FC Chapter 13 PART2 Flashcards
Both the ____________ and the ____________ are required for a corporation to open an options or margin account.
Both the Corporate Resolution and Corporate Charter are required for a corporation to open an options or margin account.
Under the Customer Identification Program, may accounts be opened for clients refusing to provide required information?
No
When is confirmation of a transaction sent to a client?
No later than completion of the transaction
True or False: Although 457 plans are considered nonqualified, contributions and growth are tax-deferred.
True
What is SIPC?
Securities Investor Protection Corporation. SIPC protects separate customers in the event of BD bankruptcy.
When are firms required to provide a non-customer (consumer) with a copy of their privacy notice?
Prior to the sharing of non-public personal information
True or False: Clients need not sign the account form for a cash account.
True, but signature would be required for an option or a margin account.
A child with a UGMA account dies at age 11 without a will. To whom do the assets revert?
To whomever state law dictates
What are some of the acceptable reasons that a custodian may liquidate positions in a custodial account?
To support or provide school funds for the child, or for reimbursement of expenses associated with being a custodian
True or False: Firms may use the official SIPC logo or create their own.
False. Only the official SIPC logo may be used.
What is needed to exercise discretion over a client’s account?
Written power of attorney
For Sue and her nonworking spouse to make the maximum contribution to their IRAs, the money must be invested ________.
For Sue and her nonworking spouse to make the maximum contribution to their IRAs, the money must be invested equally.
Since the _______ is responsible for any tax liability, custodial accounts use the tax ID of the _______.
Since the minor is responsible for any tax liability, custodial accounts use the tax ID of the minor.
A self-employed individual with income of $120,000 would like to open a Keogh plan. How much may be contributed?
The lesser of 25% of self-employment income or $56,000. In this example, $30,000 may be contributed ($120,000 x 25%).
An established customer is one that has traded with a firm for more than ____ year.
An established customer is one that has traded with a firm for more than one year.
Where would a firm disclose that it is not a member of SIPC?
On the customer confirmation
Which of the following accounts requires no supplemental documentation–guardian, partnership, UTMA, or estate account?
A UTMA (or UGMA), since account forms offer these accounts as a standard ownership choice
Under the Customer Identification Program of the USA PATRIOT Act, what information MUST be obtained about a client?
Date of birth, name, address, and an ID number
To participate in a tender offer, an investor must be long ___________ or its ____________.
To participate in a tender offer, an investor must be long the stock or its equivalent.
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
Under the TCPA, how is an established customer defined?
One that has made an unsolicited inquiry or effected a transaction with the firm
True or False: Required minimum distributions apply to Roth IRA accounts.
False. Required minimum distributions apply to traditional IRA accounts, not Roth IRAs.
SIPC provides coverage of $_________ of which no more than $_________ can be cash.
SIPC provides coverage of $500,000 of which no more than $250,000 can be cash.
Where would Do Not Reduce (DNR) instructions appear?
On the order ticket
List the proper naming sequence for registering a custodial account.
Custodian’s name, then the minor’s name, followed by the appropriate state
True or False: 529 plans allow for a five-year front-end contribution of $70,000, which avoids gift tax.
True ($14,000 x 5 years)
______ power of attorney allows a person to buy or sell securities, transfer assets, or have check writing privileges.
Full power of attorney allows a person to buy or sell securities, transfer assets, or have check writing privileges.
Define the term structuring as it relates to money laundering.
Breaking up large transactions into smaller amounts in an attempt to evade AML reporting requirements
What are some of the investments that are not suitable for IRA contributions?
Collectibles, insurance, and metals (except U.S. gold and silver coins)
Ted’s dad has been declared incompetent. A court names Ted to oversee his dad’s brokerage account. What does Ted need?
Evidence of appointment of incumbency
For an hourly employee, working _____ hours per year is considered full-time employment.
For an hourly employee, working 1,000 hours per year is considered full-time employment.
For SIPC purposes, what happens to securities that are able to be specifically identified as belonging to a client?
They are distributed to the client without regard to the dollar amount limit.
Under Regulation SP, a _________ is someone who gives nonpublic, personal information to a BD that may result in trades.
Under Regulation SP, a consumer is someone who gives nonpublic, personal information to a BD that may result in trades.
True or False: At death, assets in an account with a Transfer on Death designation are subject to estate taxes.
True
When does a firm file a Suspicious Activity Report (SAR)?
When it knows or believes the client’s funds derived from illegal activities, or the trades have no legitimate purpose
According to penny stock disclosure rules, what must BDs disclose for each penny stock trade?
The current quote of the security and the compensation to be received by both the BD and RR
When are covered option positions and penny stock transactions permitted in a custodial account?
When they do not comprise a significant portion of the account assets
After what age may traditional IRA plan contributions no longer be made?
After age 70 1/2
Beyond a death certificate, what other documents may be required at the time of a client’s death?
Inheritance tax waiver, affidavit of domicile, and letters testamentary
Ben’s margin account has a market value of $800,000 and a debit balance of $350,000. How much SIPC coverage is provided?
In a margin account, SIPC covers the net equity (market value minus debit). In this example, $450,000.
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
A BD client of six months has purchased penny stocks on five occasions. What is the client considered?
An established customer
Under Regulation SP, a _________ is someone who has an ongoing relationship with a firm.
Under Regulation SP, a customer is someone who has an ongoing relationship with a firm.
True or False: Prior to recommending stock to a client, the member must review the issuer’s current financial condition.
True
In a one-year period, how many times may a qualified plan be transferred via a trustee transfer?
There is no limit to the number of trustee transfers.
What is a security quoted on the OTCBB at 4.85 - 5.03 considered?
A penny stock
What is the maximum amount of securities that a BD may rehypothecate to a bank?
140% of the debit balance
This year, Jim contributes $7,000 to his IRA with $3,000 to his nonworking spouse’s IRA. Is this acceptable?
No. While equal amounts are not required, neither account may have more than the $6,000 maximum.
What must be included in the monthly statement sent to clients with penny stocks in their accounts?
Each penny stock owned, the number of shares, and the stock’s estimated market value
When rolling over a distribution from a qualified plan, when must the participant complete the transfer?
Within 60 days from the receipt of the funds from the old plan
How often must an updated copy of the privacy notice be provided to customers?
At least once during each 12-month cycle
True or False: The recommendation to a new client of a $4.00 stock on the OTCBB is subject to penny stock rules.
True
True or False: Under Regulation SP, requiring a client to write a letter to opt-out of information sharing is allowed.
False
Shares were mistakenly bought in a client’s account. Who is authorized to place the shares in the firm’s error account?
The firm’s principal
If a quantity error occurs when filing a trade, the client is obligated to accept the _________ quantity.
If an quantity error occurs when filing a trade, the client is only obligated to accept the desired quantity.
In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?
The earnings would be subject to ordinary income tax plus a 10% penalty.
If a client serves in the military and does not have a residential or business street address, what may be used instead?
Military personnel may use an Army Post Office Box (APO) or Fleet Post Office Box (FPO)
Once placed, a tender offer must remain open for at least ____ business days from the announcement.
Once placed, a tender offer must remain open for at least 20 business days from the announcement.
What must be checked before a BD makes telephone solicitations?
The firm’s Do Not Call List
What is the purpose of ERISA?
To establish guidelines for private sector retirement plans and protect employees from improper investments by employers
Tom has an individual account and a joint account with the same BD. How much SIPC coverage is provided?
Tom will have $1 million of coverage, since each account is covered separately.
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
A contribution of $6,000 can be made to a Spousal IRA for a non-working spouse.
Bill’s market order to buy is effected at 21.21. However, it is reported to Bill at 21.12. What price is binding?
Bill must accept the execution price of 21.21.
Two clients who are married want to invest for retirement and receive a current tax deduction. What should be suggested?
Both Traditional and Roth IRAs provide retirement benefits, but only Traditional IRAs offer potential tax deductions.
What is required if the evidence of appointment of incumbency is dated more than 60 days prior to presentation?
It must be recertified.
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution
As it relates to retirement plans, define party-in-interest.
An officer, director, or greater than 10% shareholder who may not engage in direct business transactions with the plan
Explain short tendering.
The prohibited practice of tendering shares that are not owned
True or False: The owner of an account with a Transfer on Death (TOD) designation may change her named beneficiary.
True
True or False: Regardless of income level, a contribution is always permitted in any type of IRA.
False. High income individuals may lose the ability to contribute to Roth IRAs, but may contribute to Traditional IRAs.
What is required for an RR to execute trades and have check-writing privileges in a client’s account?
Written authorization from client, written acceptance by a principal, and full power of attorney
A ___________________ is required to open an account for a partnership.
A Partnership Agreement is required to open an account for a partnership.
In a Roth IRA, when must withdrawals begin in order to avoid a late withdrawal penalty?
There is no withdrawal requirement for Roth IRAs.
Why may covered option positions and penny stock transactions be permitted in a custodial account?
Because the Prudent Investor Act examines the composition of the entire portfolio, rather than individual investments.
How many business days prior to presentation must evidence of incumbency be dated?
No more than 60 days
May a custodian make speculative investments in a minor’s account?
Yes, provided they are suitable based on the objectives.
True or False: When a client signs a power of attorney, it is immediately effective.
False. A power of attorney is not effective until approved by a principal of the firm.
True or False: Long or short futures positions are permitted in a custodial account.
False
Does the anti-money laundering program of a BD require it to file reports with a designated examining authority (DEA)?
No
What is an odd-lot differential and where is it disclosed?
An extra commission or fee that a BD may assess for executing an odd-lot order which is disclosed on a confirmation
Does SIPC protect separate customers or separate accounts?
Separate customers. A customer with both a cash and margin account with a BD would be covered once.
What is the use of a Transfer on Death (TOD) designation?
It allows the owner to name one or more beneficiaries for his account in the event of his death.
True or False: A customer confirmation is only required to disclose whether the firm was acting in an agency capacity.
False. Confirmations must disclose whether a firm acts in an agency or principal capacity.
The __________________________________________ is the SRO for the OTC market.
The Financial Industry Regulatory Authority (FINRA) is the SRO for the OTC market.
What are the requirements of a FINRA member firm’s anti-money laundering program?
To designate a compliance officer, provide ongoing training of personnel, and implement an independent audit function
Whose approval is required before changing or updating customer account information?
A supervisory principal
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
When a clearing firm receives a complaint from an introducing firm’s client, to whom must it be forwarded?
To the introducing firm and the introducing firm’s Designated Examining Authority (DEA)
True or False: When opening a customer account, a P.O. Box may be used.
False. However, if the client is in the military, he may use an APO (Army) or FPO (Fleet) as an address.
True or False: If not older than 70 1/2, an individual with earned income may always contribute to a Traditional IRA.
True. While it may not always be deductible, a contribution may be made.
Prior to a client’s initial penny stock trade, what must the client receive?
A risk disclosure document
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
ERISA gave the U.S. Government jurisdiction over private pension plans.
To what trades do penny stock rules apply?
Recommended or solicited trades of penny stocks
True or False: A clearing BD resolves a complaint received from a client of an introducing broker (IB).
False. The clearing BD acknowledges receipt of a complaint, but forwards it to the IB and the IB’s DEA for resolution.
For what reasons would a firm use its error account?
If the firm or one of its RRs executed a trade involving the wrong security/quantity or on the wrong side of the market
If a client’s order to buy XYZ at $50 is actually filled at $50 plus a $.25 commission, may the client refuse the trade?
No. The trade was executed at the price designated by the client.
What is ERISA?
Employment Retirement Income Security Act
When do gifts become the property of the minor in a custodial account?
When gifted
Bob, who has an IRA, has chosen to make contributions for a nonworking spouse as well. May this be done in one account?
No. For Bob to make contributions for himself and a nonworking spouse, two separate accounts are required.
True or False: Contributions to Traditional IRAs may be made after age 70 1/2.
False. Additional contributions are not permitted after age 70 1/2.
True or False: Before settlement, a client may transfer a trade executed in her cash account to her margin account.
True
A BD is not responsible for errors that are the _________ fault.
A BD is not responsible for errors that are the client’s fault.
Regulation S-P requires clients be provided with a ______________ detailing how BDs handle personal client information.
Regulation S-P requires clients be provided with a Privacy Notice detailing how BDs handle personal client information.
Define completion of a transaction.
When a client delivers cash or securities to a BD, or when the client’s account is debited for cash or securities
A principal of a member firm must approve discretionary orders __________.
A principal of a member firm must approve discretionary orders promptly.
Tim has both a cash and margin account with the same BD. If BD bankruptcy occurs, how are Tim’s accounts handled?
Tim’s accounts are combined for SIPC coverage purposes.
What triggers a BD’s filing of a Suspicious Activity Report (SAR)?
Any suspicious transactions of $5,000 or more
True or False: An account may be opened without a completed Form W-9.
True. However, if a Form W-9 (Request for Tax ID # and Certification) is not completed, backup withholding will apply.
When is a Currency Transaction Report (CTR) or FinCEN Form 104 filed?
Within 15 days following the transaction
Who is eligible to contribute to a qualified annuity?
Public school employees [403(b)] and certain non-profit organization employees [501(c)3]
True or False: For trades involving bonds, confirmations must disclose the yield computation used (i.e., YTM or YTC).
True
If a client dies, what action should be taken to protect the interests of any beneficiaries?
Outstanding orders should be cancelled.
True or False: If an RR executes a trade in error, the trade goes into the RR’s error account.
False. Firms, not RRs, maintain error accounts.
Explain a receipt versus payment (RVP) transaction.
A situation whereby payment on a trade is made when security delivery is received and accepted by selling client’s agent
True or False: Third-party authorization may NOT be given to a person who is neither a blood relative nor U.S. citizen.
False. There is no requirement that the person granted authorization be a U.S. citizen or relative of the account owner.
A guardian is a form of ______-appointed custodian.
A guardian is a form of court-appointed custodian.
Explain a delivery versus payment (DVP) or collect on delivery (COD) transaction.
A situation whereby delivery of securities are made to the buying client’s agent (bank) in exchange for payment
True or False: Customers are required to sign the loan consent agreement.
False, the loan consent agreement is optional.
If requested by a client, a copy of the predispute arbitration agreement must be provided within ____ business days.
If requested by a client, a copy of the predispute arbitration agreement must be provided within 10 business days.
What happens to the power of attorney to exercise discretion if the client dies?
The client’s death invalidates the power of attorney.
When a BD is acting as agent for both the buyer and seller, what must be disclosed on the confirmation?
The BD must disclose (or offer to disclose) the name of the contra-party, compensation received, and time of the trade.
The ________________ Agreement describes the customer’s pledging of securities as collateral to the BD.
The Hypothecation Agreement describes the customer’s pledging of securities as collateral to the BD.
True or False: BDs may accept oral permission from clients to exercise discretion in their accounts.
False. The client’s prior written authorization is required.
True or False: A Transfer on Death (TOD) designation creates a joint account.
False. The beneficiary has no control over the assets in the account.
What happens to the deceased’s portion in a joint account with tenants-in-common?
The deceased’s portion goes to his estate for tax purposes.
If prudent, based on a minor’s objectives, may uncovered option positions be permitted in a custodial account?
No. Uncovered option positions require the use of a margin account, which is prohibited for minors.
If Joe is 55 years old, how much could he contribute to his IRA?
For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $7,000.
What is TOD as it relates to a customer account?
Transfer on Death. TOD allows assets to transfer to a named beneficiary at owner’s death.
True or False: For the growth in a Roth IRA to be tax-free, a five-year qualification period applies.
True
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529 Plans are college savings plans with high contribution limits set by the state sponsor.
What is the role of an SRO?
Maintain fair and orderly securities markets and establish rules and regulations for protecting investors
True or False: Checking personal references provided by a client is acceptable for verifying identity.
False
If a firm uses the SIPC logo on its Web site, what must it include?
A hyperlink to the SIPC Web site
Upon receipt of a death certificate, the existing power of attorney is __________.
Upon receipt of a death certificate, the existing power of attorney is cancelled.
What type of power of attorney is required for an individual to buy and sell securities in a client’s account?
Limited power of attorney
Why is short selling not permitted in a custodial account?
Because short sales may occur only in a margin account, and minors are not permitted to establish margin accounts.
True or False: All discretionary orders must be pre-approved.
False. Discretionary orders are required to be reviewed and approved on the day the order is entered, not in advance.
_____________________________ protects customers from BD bankruptcy.
Securities Investor Protection Corporation (SIPC) protects customers from BD bankruptcy.
True or False: Custodians may liquidate positions for reimbursement of expenses associated with the custodianship.
True
True or False: All discretionary orders must be approved verbally by the client by the end of the day.
False
A BD handling a discretionary account must _______ and ________ each order by the end of the ____________.
A BD handling a discretionary account must review and approve each order by the end of the trading day.
What items are acceptable as proof of identity under the Customer Identification Program (CIP)?
Passport or driver’s license (both have a picture)
Emma has contributed money into an IRA on both a pre and post-tax basis. How will the distributions be treated?
The pretax dollars are taxable and will be taken out on a pro-rata basis according to the contributions.
When is a Suspicious Activity Report (SAR) or FinCEN Form 101 filed?
Within 30 days of discovery of the suspicious activity
The appointment of guardian/conservator and certificate of incumbency must not be older than ____ days.
The appointment of guardian/conservator and certificate of incumbency must not be older than 60 days.
A client executes three day trades over a five-business-day period. Is this client a pattern day trader?
No. A pattern day trader executes four or more day trades over a five-day period.
To participate in a tender offer, an investor may only tender shares that she is ____ long.
To participate in a tender offer, an investor may only tender shares that she is net long.
Explain the concept of holding securities in street name.
This is when client securities are held by and registered in the name of the BD
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.
How are withdrawals from a Traditional IRA treated for tax purposes?
If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
If Mary has a cash account as well as an IRA account, what coverage will SIPC provide?
The cash account is one customer and the IRA (which is a trust) is a second customer. So, $500,000 for each customer.
True or False: In an IRA, pre and post-tax contributions will be distributed on a LIFO basis.
False. They are distributed on a pro-rata basis.
