General Principles Flashcards

Question

FINRA vs. SEC Regarding Brokerage Companies

Answer 1

FINRA regulates brokers and borkerage companies/firms directly. The SEC oversees securities markets and enforces laws. FINRA operates under the SEC's supervision. Workbook 5-1

Answer 2

$250K total across individual deposit accounts $250K total across trust accounts (must be a beneficiary) $250K total across retirement accounts $250K total across joint accounts. i.e. one person can have up to $1M at one bank that is FDIC insured Textbook 5-2 and 5-3

Answer 3

Legislative passes insurance laws. Judicial (state courts) interprets laws. Executive enforces laws through the state's insurance commissioner. Textbook 5-6

Answer 4

Sale is an agreement between a buyer and a seller on the price of a security which results in a trade. Textbook 5-8

Answer 5

Include K-12 public, private, or religious school tuition, fees, tutoring, supplies, uniforms, room and board, and after school day care programs. Textbook 6-8

Answer 6

All ESA contributions are considered to be a gifts of present interest (i.e. the recipient is potentially eligible to receive the benefit immediately) Textbook 6-9

Answer 7

Any combination of the American Opportunity Credit, Lifetime, Coverdell, ESA withdrawal, or qualified tuition distribution in any one is typically not recommended due to coordination rules. Textbook 6-17

Answer 8

Coverdell and Plus do not generate federal income tax credits Textbook 6-18

Answer 9

Prepaid tuition plan is more limited and for a risk averse investor. Limitations include restrictions on out-of state costs and may not cover room and board. Also, plan may be limited to undergrad costs. Savings plans do not have these limitations. Textbook 6-19

Answer 10

Client is not eligible for education tax credits the same year education distributions are made. Workbook 6-1

Answer 11

QTPs and UTMAs are both gifts of present interests. Owner of QTP retains right to determine how and when to use money in account while custodian of UTMA loses control to minor once they reach majority age (18 in most states). Owner of QTP can change beneficiary while custodian of UTMA can not. QTP can grow tax-deferred if funds are used for qualified education expenses, UTMA growth and distributions can be subject to both regular and kiddie tax. Workbook 6-2

Answer 12

Kiddie tax rules applies to child with unearned income greater than $2600. Child can take $1300 standard deduction and remaining $1300 will be taxed at at 10%. Anything above the $2600 will be taxed at the custodian's tax rate. Workbook 6-3

Answer 13

1. Determine cost of first year of college (future value calculation). 2. Determine total amount that must be available for all four years (present value calculation using real rate of return since invested cost of college will still be increasing each year. Begin mode, PMT=cost of first year from step 1.) 3. Calculate how much parents need to start saving now to have total amount for all four years when child starts college (PMT calculation, use nominal rate of return instead of real rate of return). Workbook 6-1

Answer 14

Fed does not set the Federal Funds rate (charge for overnight loans from one bank to another bank). Fed sets the Discount Rate (rate charged for member banks to borrow from the Fed to meet reserve requirements, it is typically higher than the Fed Funds rate) Fed sets initial margin rates for securities under Reg. T. Textbook 7-9

Answer 15

Punitive damages in conjunction with wrongful death aren't taxable. Otherwise, punitive damages are generally taxable. Workbook 7-1

Answer 16

Compensatory damages are generally not taxable. Damages received for non-physical injury cases (e.g. discrimination) are taxable less the medical care expenses for emotional distress. Workbook 7-1

Answer 17

Damage awards paid periodically, and where the injured person has no right to a lump sum payment option, are not taxable. Workbook 7-1

Answer 18

The full amount of the prizes and awards (e.g. lottery winnings) are generally recognized and taxed the same year won despite the winnings being paid as a lump sum or annuity. However, if annuity option is selected within 60 days of winning, the payments are taxable as received. Workbook 7-1

Answer 19

Two quarters of negative GDP is a recession and six quarters of negative GDP is a depression. Workbook 7-2

Answer 20

GDP measures the value of new goods and services produced within a country's borders. U.S. company production in another country does not count towards the U.S.'s GDP but foreign company production within the U.S. does count towards the U.S.'s GDP. Workbook 7-3

Answer 21

When business activity ages i.e. the public stops buying because they have enough of everything they need. Workbook 7-3

Answer 22

Cash payments from payor to third parties for an obligation of the ex-spouse such as rent, mortgage, tax, tuition liabilities, and retirement account contributions. Workbook 7-3

Answer 23

Since mortgage interest is deductible up to a certain amount, you can can calculate the after-tax mortgage payment by calculating the annual interest, multiplying it by the marginal tax rate, and then subtracting it from the total annual mortgage payments. Textbook 8-6

Answer 24

Registered reps must be supervised by a FINRA-registered principal of a broker-dealer. Advisors at RIA firms are supervised by a Chief Compliance Officer of the firm subject to SEC/state regulations. Textbook 9-5

Answer 25

In order to start an RIA, the advisor first needs to register with the SEC which is the firm's main regulator. Workbook 9-1

Answer 26

ADVs must be filed with the SEC or state securities regulators for review, not FINRA. However, forms are submitted through FINRA's system. Workbook 9-1

Answer 27

1. advisor associates with (hired by) broker-dealer firm 2. advisor registers with FINRA through firm on Form U-4 3. advisor passes appropriate exams 4. Central Registration Depositary System makes registration with FINRA uniform among states Workbook 9-1

Answer 28

All advisors (offering financial advice, at a business, and for a fee) must register with the SEC or state regulator. Only advisors working as reps/brokers and selling securities (typically receiving a commission) need to register with FINRA. Workbook 9-2

Answer 29

Series 6 only allows reps to sell mutual funds, initial offerings for unit investment trusts (UITs), variable life insurance, and variable annuities. They can't sell securities that are traded on exchanges or other secondary markets. Series 7 allows reps to sell all securities except commodities and certain options. Workbook 9-2