P1 Unit 1 - Types of Accounts

Question 1

• basic investment account where a customer must pay in full for any securities purchased

Answer 1

Cash Account

Question 2

• customer can use some cash and some credit to purchase securities in this account

Answer 2

Margin Account

Question 3

• the customer, generally an institution, selects one member firm to provide custody, trading, and other services, while other firms typically execute most of the trades placed by a customer.
• provides the client with the ability to trade with multiple brokerage houses while maintaining a centralized master account with all of the client’s cash and securities.
• this type of account often includes a list of specialized services, such as securities lending, margin financing, trade processing, cash management, and operational support.

Answer 3

Prime Brokerage Account

Question 4

• account registration in which ownership provides that a deceased tenant’s fractional share in the account goes to that tenant’s estate
• this registration is most commonly used for non-spousal relatives or friends.

Answer 4

Tenants in Common (TIC)

Question 5

• business organization in which two or more individuals have an unincorporated association.
• the individuals manage and are responsible for the operation and debts of the business.
• profits and losses of the business flow directly through to investors as passive income/loss for tax purposes.

Answer 5

General Partnership

Question 6

• business structure in which one partner is responsible for the management and liability of the company and the other is not responsible for management but has liability limited to their investment.

Answer 6

Limited Partnership

Question 7

• business structure that combines the benefits of incorporation with the tax advantages of a partnership (flow-through taxable income/loss).
• owners are recognized as members and are not personally liable for the debts of this structure.

Answer 7

Limited Liability Company (LLC)

Question 8

• this business structure is taxed like a partnership but offers investors the limited liability associated with corporations.
• profits and losses are passed through directly to the shareholders in proportion to their ownership
• this can only have up to 100 members, or more than one class of stock (typically common)

Answer 8

S-Corporation

Question 9

• business structure that distinguishes the company as a separate entity from its owners.
• officers and directors are shielded from personal liability for the corporation’s debts and losses.
• corporate income tax applies as an entity rather than being passed through to the shareholders.

Answer 9

C-Corporation

Question 10

• this is required under the provisions of the USA PATRIOT Act of 2001 and was designed to verify the identity of a new customer.
• it also prompts broker dealers to maintain records of the info used to verify identity, obtain basic personal info on the client, and establish procedures that identify when and when not to open accounts for new customers/consumers.

Answer 10

Customer Identification Program (CIP)

Question 11

• referred to as the Senior Exploitation Rule, this rule defines a specified adult as “a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that makes the individual unable to protect his own interests”.
• this rule requires members to make reasonable efforts to obtain the name and contact info for a trusted person contact

Answer 11

FINRA Rule 2165

Question 12

• this regulation was enacted by the SEC to protect the privacy of customer info
• this regulation deals with nonpublic personal info (SSN, account balances, transaction history, and any info collected through internet cookies).
• this regulation embodies the obligation of financial institutions to safeguard customer info as related to all forms of existing and developing technology.
• this regulation also distinguishes between a customer and a consumer and the necessary procedures for both types of individuals.

Answer 12

Regulation S-P

Question 13

• distinguished by Regulation S-P. This is an individual who obtains a financial product or service from a firm and has no further contact with the firm.

Answer 13

Consumer

Question 14

• distinguished by Regulation S-P. This is an individual who has an ongoing relationship with a firm.

Answer 14

Customer

Question 15

• this type of retirement plan is an agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement.

Answer 15

Nonqualified Deferred Compensation Plan

Question 16

• this retirement plan is a deferred compensation plan that may be used by employees of a state, political subdivision of a state, and any agency or instrumentality of a state. May also be offered to employees of certain tax-exempt organizations.
• These plans are exempt from ERISA—nongovernmental plans must be unfunded to qualify for tax benefits, while government plans must be funded.
• These plans are generally not required to follow the nondiscrimination rules of other retirement plans.
• Plans for tax-exempt organizations are limited to covering only highly compensated employees, while any employee (or even independent contractor) of a governmental entity may participate.
• Distributions of nongovernmental tax-exempt employees may not be
  rolled over into an IRA, but there is no 10% penalty for early withdrawal.
• the governmental type of this plan must be funded, meaning it must hold plan assets in trusts or custodial accounts FBO individual participants. The nongovernmental type may not be funded.

Answer 16

457(b) Plan

Question 17

• this legislation regulates the establishment and management of corporate pension or retirement plans.
• signification provisions to this legislation include the following:
  1. Participation. This identifies eligibility rules for employees. All employees must be covered if they are 21 years or older and have performed one year of full-time service.
  2. Funding. Funds contributed to the plan must be segregated from other corporate assets. Plan trustees must administer and invest the assets prudently and in the best interest of all participants. IRS contribution limits must be observed.
  3. Vesting. Vesting defines when an employer contribution to a plan becomes the employee’s money, such as an employer-matching contribution to a 401(k) plan. There are limits on how long the vesting schedule can be. Note that an employee is always fully vested in the employee’s own contributions to a plan.
  4. Communication. The plan document must be in writing, and employees must be given annual statements of account and updates of plan benefits.
  5. Nondiscrimination. All eligible employees must be treated impartially through a uniformly applied formula.
  6. Beneficiaries. Beneficiaries must be named to receive an employee’s benefits at death.

Answer 17

Employee Retirement Income Security Act of 1974 (ERISA)