Chapters 1/2 Flashcards
What does a RR need to do prior to initiating trades with a customer?
A RR must collect information and regularly update this profile for any changes to the customer’s circumstances/needs. RRs need to get info about the client’s financial situtation, personal characteristics, and investment objectives.
True or false: If a customer refuses to give financial info to the RR when setting up their profile, the RR can make assumptions?
False, a RR may only make recommendations based on facts given by the customer. In some cases, there may not be enough info given to accept them as a client.
Regulation Best Interest (Reg BI)
An SEC rule to enhance clarity and transparency between RETAIL CLIENTS and RRs. This rule says that any recommendations (from RRs) must be in the client’s best interest and not the firm’s.
- RRs are subject to Reg BI, whereas IAs are subject to Investment Advisors Act of 1940.
Who is a retail customer according to Reg BI?
A natural person (or this person’s non-professional legal
representative (someone acting on another person’s behalf in a personal capacity and NOT a professional capacity)) who:
- Receives a recommendation regarding securities from a BD
- Uses the recommendation primarily for personal, family, or household purposes.
- Professional legal representatives (e.g., financial industry professionals) and other fiduciaries are NOT considered retail customers.
Client Relationship Summary (Form CRS)
Along with Reg BI, the SEC mandated that financial professionals provide retail investors w/ info about the nature of their relationship.
New retail investors must receive a copy of Form CRS by no later than the time they open a brokerage account, place an order, or receive a new recommendation for an account type, securities transaction, or investment strategy
RRs file Form CRS w/ the Central Registration Depository (CARD) while IAs file w/ the Investment Adviser Registration Depository (IARD).
* Must be no longer than 2 pages & written in plain English!!
Although the SEC doesn’t provide an exact definition for the term “best interest” what four obligation must brokerages fulfill to satisfy Reg BI?
- Disclosure: Provide retail clients w/ mandatory disclosures.
- Care
- Conflicts of interest
- Compliance
True or false: Firms are required to comply with both FINRA’s suitability rules and Reg BI from the SEC?
True. The only difference between the rules is that FINRA says that an institutional customer (their nomenclature for retail customer) is a natural personal w/ assets >= $50mm. Reg BI doesn’t establish a dollar limit
True or false: Under Reg BI, unless a BD is dually registered as an IA, they CANNOT use the term “adviser” or “advisor” in its title?
True
True or false: Regulation BI effectively bans all sales contests, quotas, bonuses, and other non-cash compensation that are tied to sales of specific securities or specific types of securities within a limited
period?
True. However, compensation that’s based on other metrics, such as total sales, asset growth or accumulation, or customer satisfaction is still permitted.
Financial considerations that RRs use for profiling new clients?
- Occupation
- Income
- Taxation
- Capital Gains/Losses
True or false: As a general rule, the lower a retail customer’s income, the higher their risk tolerance?
False, as a general rule, the higher a retail customer’s income, the higher their risk tolerance, and the lower their income, the more conservative their investment strategy.
Four basic types of income
- Earned/Ordinary Income: Someone’s salary/wage that is taxed at their marginal tax rate.
- Passive income: Income derived from a business venture where the person does not have an active role (ex: limited partnership).
- Investment income
- Deferred income: earned income in an account which requires that taxes be paid at a later date (non-roth 401k)
- Passive income is taxed in the same manner as both earned and investment income. The difference is that passive losses may only be used to offset other passive income or gains, but may not be used to offset earned income or portfolio (investment) income.
True or false: A person’s marginal tax rate is the rate he pays on the taxable income that falls into the lowest bracket?
False, a person’s marginal tax rate is the rate he pays on the taxable income that falls into the highest bracket
True or false: Cash dividends and stock dividends are taxable in the year of receipt?
False, cash dividends are taxable in the year of receipt, but investor must adjust the cost basis per share of their position in the stock rather than declaring the additional shares as income.
Are corporate, U.S. government, and municipal bonds taxed at the federal and state levels?
Corporate bonds
Federal taxatation: YES ; State taxation: YES
U.S. Government bonds
Federal taxatation: YES ; State taxation: NO
Municipal Bonds
Federal taxatation: NO ; State taxation: Dependent on the issuer and the customer’s state of residence
Progressive vs regressive taxes
Progressive taxes get larger as a % of your income as your income bracket gets higher (ex: income tax, gift tax, estate tax)
Regressive taxes are flat taxes (ex: sales tax, SSN tax).
Qualified dividend
A dividend that’s taxed at the same rate as LT capital gains (maximum rate of 20%), rather than a person’s ordinary income tax rate.
- Most dividends from corporations are qualfiied dividends, however dividends from REITs are taxed at ordinary income rates.
Alternative minimum tax (AMT)
A method of calculating tax liability to ensure that wealthy individuals who derived income from certain types of investments pay at least a specified minimum amount of taxes. By applying the AMT, investors are not able to avoid paying taxes altogether
- Under AMT, taxpayers must calculate their taxes twice. First using the standard method, and then using the AMT method. The greater of the two is what they owe.
What $ amount of assets may an individual transfer (gift) to another individual without incuring gift taxes?
$19k. A married couple may combine to gift up to $38k.
- The marital deduction allows a husband and wife to give each other an unlimited amount of property w/o incurring gift taxes. The spouse who dies first may also leave an unlimited amount to the survivor w/o incurring estate taxes.
How are capital gains/losses taxed?
Gains: If investors sell the assets within a year of buying them, that’s considered ST and they are taxed as ordinary income. For longer than a year, they’re considered LT and taxed at a max. rate of 20%.
Losses: Not taxed, but are instead netted against gains. If when netting against gains it completely wipes out gains, you can then use a maximum of $3k to reduce taxes on ordinary income. Anything in excess of this, will be carried forward into future years.
Tax filing statuses
Single people: File taxes marked single or head of households if they have dependents. Head of household qualifies for lower rates and a higher standard deduction.
Married people: File taxes marked jointly or married filing separately. Jointly provides more benefits.
- Marrital status is dependent on the status as of 12/31 of the filing year. If a couple is legally divorced, as of 12/30, they are considered single as of the whole year for tax purposes. The opposite is true if they married on 12/30.
Net worth
A measure of total wealth. An individual’s total assets minus liabilities.
* High income ppl may not have high net worth because of amts of debt.
- As a general rule, the greater a person’s net worth, the more investment risk she’s able to tolerate. And conversely, the lower the net worth, the more conservative the investment strategy should be.
Liquid net worth
Net worth excl. assets that are not readily convertible into cash (ex: RE, limited partnerships, etc.)
Non-financial considerations that RRs use for profiling new clients?
- Age
- Time horizon
- Investment experience
- Risk tolerance
- Social value
True or false: One general approach that’s used by many professionals is to subtract a client’s age from 100 to determine the % of assets that should be invested in stocks?
True
What are the broad categories of investment objectives?
- Capital (cash) reserve: Typically want at least three months worth of living expenses and should be held in a liquid investment (ex: MMDA)
- Preservation of captial
- Liquidity
- Current income
- Growth
- College funding
- Retirement funding
- Speculation: Investors looking for above-avg. returns.
- Tax relief
- Meeting fiduciary obligations: At times, assets are being invested for the benefit of a 3rd party (ex: child or incapacitated relative).
Purpose of regulation of customer interactions
- Promotion of just and equitable principles of trade/business
- Maintenance of higher standards, honor, and integrity by RRs
- Prevention of fraud and manipulation
- Prevention of unreasonable profits and commissions
- Protection of investors
True or false: An investment recommendation from an RR that results in a significant loss may still have been a suitatble investment?
True, the RR may have used their best judgement and it just didn’t pan out.
True or false: Suitability requirements apply to securities recommendations but not general investment strategy?
False, they apply to both.
3 main obligations of FINRA’s suitability rule:
- Reasonable-basis obligation: If RRs are going to recommend a security, they should ensure it’s suitable for at least some investors.
- Customer-specific obligation
- Quantitative obligation: A series of recommended transactions, even if suitable for customer, may be excessive when the customer’s investment profile is taken into consideration (prohibits churning).
Suitability obligations to an institutional customer
- RRs must have a reasonable basis to believe that the institutional customer is capable of indepently evaluating investment risks in regards to specific securities and investment strategies.
- The institutional customer must affirmatively state that it’s exercising independent judgement in evaluating the recommendations.
- When conducting business with institutional customers, the reasonable basis and quantitative obligations standards still apply, but the customer-specific obligation standard does not.
Suggested methods to use when verifying an investor’s accredited status
- Review tax forms to determine income
- Review bank and brokerage statements for prior 3 months to determine net worth
- Obtain written confirmation of accredited status from BDs, IAs, attorneys, or CPAs
- The SEC doesn’t stipulate that any one of these methods must be used; instead, the requirement is to take reasonable steps to ensure that the persons to whom the solicitations are being directed are accredited investors.
True or false: The SEC requires that a client’s net worth be verified before recommending investments?
False, they suggest it is.
What must BDs/RRs disclose to clients when using an investment analysis tool?
- Criteria
- Methodology
- The tool’s limitations
- Explain that results may vary
- Describe the universe of investments and how they are selected
- Explain whether certain investments are favored over others
- Display a disclosure saying that the productions are provided by the tool
- Provide FINRA w/ access to the tool unless SOLELY used by institutional investors.
Discretionary income
Total income less required payments. This is most helpful when determining the money available for a person to invest.
True or false: Existing customers must receive an updated copy of Form CRS any time they open a different type of account, roll over assets from a retirement account, or receive a recommendation for a new service/product that will not be held in their existing account?
True. To satisfy this obligation, the form may be delivered electronically.
True or false: Earnings generatred within an annuity are tax-exempt?
False, earnings generated within an annuity are tax-deferred (subject to tax at a later date).
Cash accounts vs margin accounts
Cash accounts are brokerage accounts where all trades are paid for in full.
Margin accounts are brokereage accounts where a client can trade on credit.
Info FINRA requires during new account opening:
- Client’s name and address
- Whether client is of the legal age
- Name of the RR responsible for the account (if multiple RRs- each RR should be listed and their scope should be listed) (this bullet doesn’t apply to institutional clients)
- If the client is a corporation, partnership, or other legal entity, the names of any persons authroized to transact on its behalf
- Signature of the partner, officer, or manager denoting accepance of the account
- A PO box may not be used as an address but mail regarding the account can be sent there. The only exception is a military PO box.
- Firms must ask clients for updates at least every 3 years to check for updates.
- Customers are not required to provide signature for cash accounts.
Prior to the settlement date of the initial transaction, FINRA requires that a reasonable effort (a request for the info) be made to obtain this info:
- SSN or taxpayer identification number (TIN)
- Customer’s occupation and employer’s name and address
- Whether the customer is associated w/ another member firm.
- Financial info, such as annual income and net worth
- Investment objectives
- THIS SECTION (requested information) doesn’t apply to institutional accounts and accounts in which the transactions are limited to non-recommended investment company shares (e.g., mutual fund shares)!!!!!
Institutional account
Bank, S&L, insurance, registered investment company, IA, or any person with >= $50mm of assets.
True or false: For discretionary accounts, a firm is also required to maintain a record of the manual signature of each named natural person and the date on which the person was authorized to exercise discretion?
True
For cash and margin accounts, clients are required to give their signature at the account opening?
False, for cash accounts, industry rules do not require a client signature. However, for option/margin accounts they do. The approving principal of the BD must always sign the new account form.
Disclosures required if a new account form contains a clause that obligates customers to submit diputes w/ their RR or the BD to binding arbitration (a neutral 3rd party):
The disclosures must be highlighted:
* Arbitration is final and binding on the parties
* The parties are giving up their right to seek remedies in court, including the right to a jury trial.
* Prearbitration discovery is generally more limited than, and different from, court proceedings.
* It’s not required that the arbitrators’ award include factual findings or legal reasoning, and any party’s right to appeal or seek modification of rulings by the arbitrators is strictly limited.
* Typically the panel of arbitrators includes some individuals affiliated w/ the securities industry.
True or false: Clients can trade under names other than their birth name?
True, in order to protect privacy clients can trade under nominee names or just use an account number as long as firms maintain records regarding the beneficial owners of the accounts.
Recordkeeping requirements
SEC and FINRA require that BDs maintain records of client info for six years after any update is made and six years after the date an account is closed.
Types of brokerage accounts
- Individual accounts
- Joint accounts
- Corporate accounts
- Unincorporated association accounts
- Sole proprietorship accounts
- Partnership accounts
- Fiduciary accounts
- Custodial accounts
- IA Accounts
- Wrap Accounts
Individual accounts
Accounts opened by and for one person. A 3rd party may be authorized to direct activity.
Joint accounts
Accounts that have more than one owner. In most cases, any joint owner can direct activity, but if a firm requires client signatures, then only owners who have signed.
New account info should be obtained for each joint owner.
Joint Tenacy w/ Right of Survivorship (JTWROS)
1/3 types of joint accounts. These accounts are owned by at least 2 people, where all tenants have an equal right to the account’s assets and the remaining owners get survivorship rights when the other owner(s) die. Often creates by married couples.
Tenancy in Common (Ten Com)
1/3 types of joint accounts. W/ these accounts, each owner has a % of of ownership, and at the time of death the deceased person’s interest passes to their estate. DOES NOT have to be equal ownership. This is common for business partners.
- When the owner dies, the assets are transferred to the estate vs the other owners
Community Property Accounts
1/3 types of joint accounts. These are essentially the same as JTWROS but only permitted between legally married couples. A community property document must be completed.
Corporate accounts
A brokerage account for a corporation. The RR must ensure that the person opening the account is authorized to do so by obtaining a corporate resolution. This is where the BOD appoints one or multiple people to operate the account.
- A corporation opening an options/margin account must provide a copy of the corporate charter. The charter is the document that certifies whether the corporation is authorized to have such an account.
- A corporate charter is not required for a cash account.
- Corporate resolutions are required regardless of whether the corporation is opening a cash or margin/option account.
Unincorporated association accounts
These accounts are opened in the name of the owner, which can be a business name. The ownership of the account is subject to creditors’ claims.
Sole proprietorship accounts
Brokerage accounts opened by a sole proprietor. The account is vulnerable to the owner’s personal creditors.
Partnership accounts
Brokerage accounts for partnerships. RRs must obtain info from each general partner during the opening process. The partnership agreement must specify the partners who are authorized to execute transactions on behalf of the partnership. BDs must maintain a file of the partnership agreement for recordkeeping.
Fiduciary accounts
Accounts opened by fiduciaries. The fiduciary must provide documentation of their authority. The Uniform Prudent Investment Act (UPIA) acknowledges that there are no categorical restrictions on investments made by fiduciaries.
Required info to open a trust:
- Evidence of the trustee’s authority to transact business in the account
- A copy of the trust agreement
Revocable trust/Living trust/Inter vivos trust
The individual can make any changes (incl. cancelling it). Assets don’t transfer until death. This trust does NOT reduce taxes, but DOES avoid probate when funded prior to the grantor’s death.
Irrevocable trust
Once assets are deposited into the account, the trust cannot be modified or canceled. This type of trust reduces estate taxes and avoids probate.
Custodial accounts
Accounts opened for minors. The legal age for opening an account varies state by state. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minor Act (UTMA) are the 2 primary types of custodial accounts and very similar.
W/ custodial accounts, an irrecovalbe gift of cash or securities is given to a minor by an adult and an adult custodian becomes a fiduciary. There can only be one custodian and one minor per account. There’s no limits on the amounts that may be gifted, but taxes occur after $19k per year.
Once the minor reaches legal age, the assets are transfered into an account under their name.
* Custodial accounts are registered in the name of the custodian.
- Under UTMA, the minor is repsonsible for paying taxes for any capital gains and the custodian may receive a fee for managing the account.
- A custodian is allowed to authorize investment discretion to a RR or IA.
- Custodial accounts may NOT be margin accounts.
- A custodial account may be opened under the minor’s SSN
Trading authorization
A power of attorney that allows someone other than the owner of the account to make trades. The owner can offer this person full or limited authoization.
Limited trading authorization vs full trading authorization
Limited trading authorization: The authorized person can place orders for the account but not make withdrawals of cash/securities.
Full trading authorization: The authorized person can place orders and make withdrawals.
With either of these, BDs must receive written trading authorization that’s signed by the account owner and the authorized person prior to permitting the authoized person to make trades or withdrawls.
- With limited discretion, the representative may place orders before they’re approved; however, they must be approved promptly thereafter by a principal.
Regular (non-durable) power of attorney vs durable power of attoney
Regular (non-durable) power of attorney: Terminates if the grantor becomes incapacitated
Durable power of attorney: The opposite
Either type is terminated in the event of the grantor’s death
Discretionary account
When the RR is the authorized third party. In order for this account to be opened, an authorization form must be signed by the client and the designated power of attorney. A principal must accept this in writing for it to become effective and then approve each trade on the day of the trade. Activity must be monitored to prevent churning.
W/ discretionary accounts, RRs generally do not need the account holders approval before executing every transaction unless it’s buying the member firm’s own stock.
True or false: If a customer indicates the specific asset, whether it’s bought/sold (action), and the number of units (amount), but leaves the discretion as to the time and price to the RR, this is still considered a discretionary order?
False, this is not a discretionary order and does not require written authorization.
Remember the 3 As: asset, action, amount- not discretionary.
- Orders that provide discretion for price and time are often denoted as not-held orders.
- A client must give the RR written instructions if the not-held order is to remain in effect for more than one day.
Day trading
The purchase and sale—or the sale and purchase—of the same security, on the same day, in a margin account. Day trading is not permitted in a cash account.
Pattern day trader
Any customer who executes >= 4 days trades over a 5 day period. Member firms must provide a risk disclosure statement to retail customers wanting to open this type of account but this is not required for institutional clients.
- If a customer meets the definition of a pattern day trader, but the number of day trades is 6% or less of total trades for the five-business-day period, the customer will not be considered a pattern day trader.
- Firms must believe that day trading is appropriate for the customer before opening one of these accounts.
What happens if an individual is day trading in a regular account?
The account must be approved for day trading within 10 days.
True or false: Day trading advertisements must be filed and approved by FINRA and a copy maintained for at least 3 years?
True
Prime brokerage servcies
When clearing firms offering a bundled packages of services to clients. Prime brokerage clients are hedge funds, institutions, and high net worth individual clients.
In a prime brokerage arrangement, a client selects one firm as its prime broker to consolidate the bookeeping process. The client can still use multiple BDs for execution, research, and access to IPOs, but all trades are handled through the prime broker.
- An advantage to prime brokerage services is that it allows customers to lower their cost of funds by concentrating their margin positions into a single account.
- Prime brokers may execute and clear transactions, and may also provide securities lending services to a hedge fund
DVP/RVP Accounts
When clients instruct BDs to interact w/ banks rather than themselves for delivery of payments. The BDs then send the trade details to the bank, and the banks will send the money from the client’s account to the BDs or send the securities to the BD for client sales. Before accepting this type of account, the BD must obtain the customer’s account number and name of the agent bank.
DVP = delivery versus payment. When the BD sends the stock the client purchases to the bank, and the bank pays the BD w/ money from the client’s account.
RVP = receive versus payment. When the BD sends money to the bank and the bank in return sends the BD the security from the client’s account.
- DVP is also referred to as collect on delivery (COD)
- These are typically used by institutions.
Investment Adviser Accounts
When IAs acts as portfolio manager for clients. Clients must provide written authorization for the adviser to transact business in the account.
Wrap Accounts
An account where one fee (usually 1%-3%) is charged by a BD or a number of services being provided. A wrap account is usually offered by a BD but managed by an IA. These are used for clients who trade frequently.
ERISA
Federal law surrounding employer-based pension plans. ERISA does not apply to IRAs. ERISA emphasizes conservative investments being a priority. Aggressive derivative strategies are outlawed. Since pension plans grow tax-deferred, fiduciaries should avoid tax-free investments.
Retirement account transfers and rollovers
Investors can transfer funds from one 401k to another w/o incurring taxes as many times as they want within a year.
Investors may also rollover 401k plans to IRAs or vice versa w/o incurring taxes as long as it’s completed within 60 days. This can only be done once a year.
True or false: A withholding tax of 20% may apply if a person transfers funds from one retirement account into another and receives a check that’s made payable to her name (this transfer is
considered a rollover)?
True. The withholding tax can be avoided if the funds are transferred directly from one retirement account to another and the check is made payable to the new trustee.
Early withdrawal penalties
An investor who withdraws money from a retirement account before reaching 59 and 1/2 will be required to pay a 10% tax penalty on the amount withdrawn, along with paying ordinary income taxes on the withdrawal.
Exceptions for early retirement account withdrawal penalty
- The account owner has become disabled.
- The account owner dies and the money is withdrawn by the beneficiary
- The withdrawals are set up as a series of equal periodic payments over the owner’s life expectancy
- The money is used to pay for medical expenses not covered by insurance.
Exceptions for early IRA withdrawal penalty
- Medical insurance premiums when the owner is unemployed
- Expenses related to being a qualified first-time home buyer (capped at $10k)
- Expenses related to birth/adoption of a child (capped at $5k)
- Paying for higher education expenses for themselves of an immediate family member
Required minimum distributions
Investors who wait too long to begin withdrawing from their IRAs will also be subject to a penalty. People have to begin withdrawing by the time they’re 73.
THIS PROVISION DOES NOT APPLY TO ROTH IRAs
Qualified retirement plans
A plan that covers all employees 21 and older who have worked full-time for the employer for at least a year (full-time = 1,000 hours during a year). To be a qualified plan, employees must be either fully vested after 5 years OR 20% vested after 3 years and become fully vested after 7 years. The investment of plan assets must follow strict fiduciary guidelines.
Benefits of a qualified plan
- Pre-tax contributions. Money is not taxed until withdrawn.
- Tax deferred growth: Dividends and interest aren’t taxed.
- Payments received at retirement may qualify for special tax treatment.
401k plans
A type of qualified plan the relies heavily on employee contributions rather than being entirely funded by employer contributions. Once withdrawn, the money is taxed as ordinary income. Employers can match employee contributions but may choose to have a vesting period.
Employers are permitted but not required to allow employees to take loans from their 401k plans. The loan is typically five years. The IRS limits the max. loan amount to the lesser of 50% of the amount vested or $50k.
403(b) plans/ tax-deferred annuities/tax-sheltered annuities
Tax-deferred retirement plans available for public school employees or employees of non-profits. Technically not a qualified plan.
3 phases of retirement plans and education savings plans
- Contributions
- Growth
- Distribution/Withdrawals
Need to have an understanding of taxation of each of these phases.
Taxation of contributions
Contributions are typically made on a pre-tax basis: Part of the money from your paycheck goes to these plans prior to being taxed. If the contributions are made pre-tax, they are said to be on a zero-cost basis. Pre-tax contributions reduce an individual’s reportable income.
If the contributions are made post-tax, they will not be taxed once withdrawn.
Taxation on growth or trading events during the plan’s life
Income during the plan’s life is tax-deferred. Retirement plans never generate capital gains/losses.
Taxation of distributions
Post-tax contributions are not taxed upon distribution but pre-tax contributions are taxed at ordinary income levels during distribution.
True or false: Non-qualified retirement plans are not required to meet ERISA standards regarding employee coverage, contribution limits, and vesting?
True
457 Plans
A type of non-qualified education plan. This is a tax-advantaged defined contribution plan that may be established by state and local government employers. The plans allow for pre-tax contributions that reduce taxable income. The IRS caps the annual contribution for individuals.
There is no penalty for early withdrawal from these plans but any deductions are taxed as ordinary income.
Restrictions of non-governmental 457 plans
- Must be limited to higher compensation employees
- Any money invested cannot be rolled over into another tax-qualified plan. GOVERNMENTAL 457 PLANS CAN.
- Any non-vested money contributed by the employer remains property of the employer. In a 401(k) or 403(b), these contributions by the employer are set aside in a trust for the exclusive benefit of the employee.
Profit-sharing plans
A type of non-qualified plan. When employers give discretionary annual contributions from the firm’s profits to employees’ retirement accounts. Generally, each employee receives a % of their salary as a contribution in these plans.
W/ profit-share plans, employer contributions are tax-deductible and earnings grow on a tax-deferred basis, but the maximum annual contribution is determined by the IRS.
ESOP
A type of non-qualified plan. Employee benefit plans where the firm contrbites its stock (or money to purchase its stock) to the plan. The stock generally comes from retiring employees or employees that left. When an employee retires, they usually don’t receive stock but the cash equivalent of the value of the stock.
Payroll deduction plans
A type of non-qualified plan. These plans allow employees to purchase life insurance, mutual funds, and variable annuities by having after-tax deductions taken from their paychecks. These allow employees to purchase these products for lower if they bought them individually on the open market.
Deferred compensation plans
A type of non-qualified plan. When employers agree to pay employees all or part of their wages at a later date- usually at retirement, disability, death, or termination. The advantage here is that the funds are paid out when the employee moves to a lower tax bracket.
These plans may be funded or unfunded. Funded meaning they are secured by specific assets, and unfunded meaning it’s simply a promise.
CTRs vs SARs
CTRs are filed for all cash transactions that exceed $10k (on an aggregated basis- can’t do 10 $1k transactions) executed by a single customer in a day.
SARs are filed whenver a transaction or group of transactions exceeds $5k and the client is suspected of violating federal crimes, illegal activity, the transaction is designed to evade reporting requirements, or the transactions has no legitamite business purpose.
Under no circumstances may a RR tell a client that a SAR has been filed.
Specially Designated Nationals (SDN) list/Blocked List
An OFAC list of suspected terrorists or other wanted criminals and blocked persons.
- If a firm learns that client is on the SDN list, the firm must contact law enforcement immediately
What does BSA require a BD to verify before or after a new account opening
- Name
- Date of birth
- Address
- Identification number
- A BD can waive the requirement of obtaining a tax ID # if a person has applied but not yet received one. In this case the BD MUST obtain the application for the tax ID.
- A BD MUST retain records of methods used to verify customer ID for 5 years after the closing of the account.
True or false: BDs must send clients documentation of the info collected at account opening within 60 days of the opening of the account OR at the time the client’s next statement is sent and MUST check for updates on account info at least every 12 months?
False, BDs must send clients documentation of the info collected at account opening within 30 days of the opening of the account OR at the time the client’s next statement is sent and MUST check for updates on account info at least every 36 months?
True of false: If a client fails to provide a SSN or Tax ID during the account opening process, they may be subject to backup withholding?
True
SEC Reg SP
Forces financial firms to establish privacy policies, notify clients of such policies, and give clients the right to opt-out of any disclosures of their nonpublic personal info to 3rd parties.
Disclosure of clients’ public info is not governed by this reg.
Customer vs consumer under Reg SP
Customer= A person who has an ongoing relationship w/ the firm. Firms must provide every customer w/ a privacy notice at the time the relationship is first established and follow up w/ an updated notice annually.
Consumer= A person who is in the process of providing info to the firm in connection w/ a potential transaction. A BD must provide a privacy notice before it discloses non-public info to a 3rd party. However, if the firm will not disclose nonpublic info to a 3rd party, then a notice is not required.
FTC Red Flag Rules
Requires member firms to create and implement a written identify theft prevention program designed to detect, prevent, and mitigate identity theft.
True or false: If a member firm is acting as a trustee for a corporation, they can use a shareholder list to cold-call shareholders in other matters?
False, this is generally a violation of industry rule.
True or false: Any insider (a shareholders with >= 10% of the voting stock of a corporation) must report their position to the SEC within 1 day of becoming an insider?
False, within 10 days. And an insider is required to file Form 4 to report any changes in his stock position by the second business day following the change.
Short-swing profits
When an insider sells their stock at a profit within 10 months of its acquisition. Insiders are NOT permitted to keep short-swing profits. This restriction also applies if an insider sells stock that was held longer than six months and then, within six months of the sale, repurchases it at a
lower price than the previous sale price
Disorgement
When companies sue insiders for recovery of short-swing profits
True or false: Insiders can short sell their company’s stock?
False. Insiders may write or sell covered calls but not uncovered calls.
Employee requirements when opening outside trading accounts
Must obtain prior WRITTEN approval from their firm and provide WRITTEN notification to the outside firm that they are an employee of a member firm. This applies to any employee, the employee’s spouse/children, or any other individual whom the employee has beneficial interest.
- If an employee had opened the account prior to starting at the firm, he must obtain written consent from his employer within 30 days of starting and notify the outside firm.
- The outside firm does NOT need to obtain the employing firm’s approval before every trade.
- The executing firm is required to provide transactional info to the employing firm upon request.
- REQUIREMENTS OF THIS RULE DO NOT APPLY TO MUTUAL FUND SHARES, UNIT INVESTMENT TRUSTS, VARIABLE CONTRACTS, OR 529 PLANS.
Federal Reserve Board requirements for payments
Payments must be made for purchases in a cash and margin account within two business days of settlement (S + 2), which is equivalent to three business days following the trade date (T +3) since most trades are settled within one business day.
- Payment extensions can be granted by FINRA
- If no payment is made and no extension granted, the position is closed (securities sold) on the 3rd business day following settlement and the account is frozen for 90 days.
What should a RR do when learning of a client’s death?
- Immediately cancel all open orders
- Mark the account as deceased
- Await instructions from the executor of the estate (rather than just any family member)
True or false: ERISA prohibits all strategies involving options contracts?
False, aggressive derivative strategies are prohibited but certain conservative option strategies (ex: covered call writing) are permissable.
Hypothecation agreement
Required during the opening of a margin account.
For customers who are subject to the alternative minimum tax, a registered representative should understand the implications of investing in what?
Limited partnerships and munis
