Series 7 chapter 2

Question 1

Tenants in common (TIC)

Answer 1

deceased tenant’s fractional interest in account must be retained by tenant estate and not passed to surviving tenant
Each party specifies interest in account
May be used by more than two individuals

Question 2

JTWROS

Answer 2

Deceased tenant’’s interest in the account passes to surviving tenant
All parties undivided interest in account
In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account

Question 3

Basic steps applied at death of customer

Answer 3

Cancel open orders, freeze account, await instructions from executor of estate
Upon being notified of the death of a client, the registered representative assigned to the account should cancel all open orders (GTC and day) and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. There is no requirement nor is it the responsibility of the firm to contact the decedent’s attorney or beneficiaries.

Question 4

New Account Form

Answer 4

Customer signature NOT required
Need partner, officer or manager (principal) signature
Must have name, address (not PO Box), SS # or tax #, and date of birth

Question 5

Qualified plans

Answer 5

Allow pretax contributions

Question 6

Nonqualified deferred compensation plan

Answer 6

Employee defer receipt current income in favot of payout at retirement
Risk that employee has not right to plan benefits if bzi fails (would become general creditor)
Benefit taxed as OI
Benefits high paid employees near retirement

Question 7

Not permitted/approrpiate IRA

Answer 7

Collectibles, life insurance contracts, muni bonds, margin account trading, short sales of stock, uncovered call options

Question 8

ROTH IRA

Answer 8

Same contribution amounts as traditional IRA
earnings accumulate tax deferred
Contribution limit 100% earned income but max
Contributions are nondeductible, can be made , okay contribute 70.5, withdrawals do not need to begin at 70.5
Can withdraw contributions at any time w/o tax or penalty
If initial contributions <5 years, trigger OI taxes plus 10% penalty
Income limit on contribution
<59

Question 9

Penalties with IRA

Answer 9

Excess contribution 6%
Pre 59.5, OI plus 10% penalty
Post 70.5 insufficient RMD, OI plus 50% on the difference

Question 10

Determine discreitonary

Answer 10

Activity, Amount and asset

Question 11

DC plan

Answer 11

Younger benefit, annual contribution predetermineed by employeer
Emplyeer risk

Question 12

DB plan

Answer 12

Older benefit, annual contribution actual calc
Risk on employer
Specified benefit at retirement
Contribution determined by trust agreement

Question 13

Roth 401K

Answer 13

AT contribution, tax free withdrfawl provided plan owner at least 59.5
No income limitation
Employer contribution only to traditional 401
Must make RMD at 70.5 unless working

Question 14

Profit sharing

Answer 14

DC plan
Employers may skip contributions in unprofitable year
Trust sets up

Question 15

TSA

Answer 15

Public education, tax exempt organziations, religious organizations
qualified plans
No studnets allowers
Distributions 100% taxable and 10% penalty to distribution before 5.5

Question 16

Rollover

Answer 16

One trustee to another, for IRA
100% funds must be rolled into account within 60 days
One rollover allowed every 365 day period

Question 17

Transfer

Answer 17

Accounts assets sent directly from one custodion to another and the account owners never takes possession of funds
No limits

Question 18

Recharacerization

Answer 18

Traditional IRA to ROTH
used to exceeding earnings limitations on contribution to a ROTH
Decrease in value of account since conversion

Question 19

RR opening up trading account at another broker

Answer 19

Rep must obtain permission of employing BD prior to opening account
Rep must inform BD where account is being opend
Permission not required of BD if purchasing securities directly from investment company

Question 20

Transfer time

Answer 20

Within 1 business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account and within 3 business days following validation, the carrying firm must complete the transfer of the account.

Question 21

Full/Partial power of attorney

Answer 21

For a person other than the account owner to be able to withdraw assets, a full power of attorney is required. A limited power of attorney allows someone other than the account owner to trade in the account, but not to withdraw assets.

Question 22

FINRA Rule 2273

Answer 22

FINRA Rule 2273 is applicable for 3 months after the hire. Educational material that discloses costs and incentives must be sent within 3 business days when the contact is oral in nature. If the former customer contacts the new firm to transfer assets within the 3 months of hire, the firm must deliver the educational material with account approval documentation.

Question 23

A customer wishes to open a cash account and give trading authorization to a sibling. The required documentation would include which of the following?

Answer 23

If one party wants to give discretionary privileges to a third party in a cash account, a member firm requires a new account form and a limited power of attorney. A limited power of attorney gives the third party trading authority, but prohibits that party from withdrawing assets from the account.

Question 24

Deferred compensation plan

Answer 24

Deferred compensation plans are nonqualified plans that allow an employer to select employees to participate in the plan. These plans are more suitable for highly compensated employees that are just a few years from retirement allowing them to defer earnings and taxation until then. Offering this type of plan to young employees is less suitable due to the risk that the business could fail, or the risk that they may leave the firm prior to retiring and thus forfeit any benefit. Defined contribution plans are considered more suitable for those further from retirement.

Question 25

Trusted Contact person (Rule 4512)

Answer 25

If person opening account 65 or older, FINRA requires reasonable effort made ot find name of and contact info of trusted contact person

Question 26

Discretionary Power

Answer 26

Must filed trading authroization or a limited POA with BD
Principal approval is required for a RR to have
officer or partner of brokerage must apporve each order promptly and in writing
Record kept all transactions,

Question 27

Death of customer steps

Answer 27

Cancel open orders
Freeze the account
Await instructions from executor of the estate

Question 28

Dividend exclusion rule

Answer 28

Dividends paid from one corporation to another or 50% exempt from taxation

Question 29

Corporate profit sharing plan must have

Answer 29

All corporate pension and profit-sharing plans must be set up under trust agreements. A plan’s trustee assumes fiduciary responsibility for the plan.

Question 30

Community property rules

Answer 30

Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property and laws in states that recognize community property ownership differs from jurisdiction to jurisdiction.

Question 31

ERISA

Answer 31

ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities, such as city and state governments.
ERISA was created to protect the retirement funds of union members and employees of large corporations. ERISA guidelines state that all qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA.

Question 32

Opening accounts

Answer 32

Once payment and delivery instructions are established at the time the account is opened they can be changed for any individual transaction or for all transactions going forward.

Question 33

Patriot act

Answer 33

The U.S.A. PATRIOT Act requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and to determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Asset Control (OFAC).

Question 34

SIMPLE plan

Answer 34

SIMPLEs are retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit which can include catch-up contributions for those age 50 and older. The employer is permitted to make matching contributions for employees.

Question 35

cash vs. margin account

Answer 35

To open a cash account, only the signature of the principal accepting the account is required. For margin accounts, the signature of the customer would be required on the margin agreement.

In order to open a cash account, the corporation must send a corporate resolution, which tells the brokerage firm who will be making trades for their account. If opening a margin account, the corporation would also have to send a copy of their corporate charter.

Question 36

Tax sheltered annuity (403B plans)

Answer 36

Public educatin institutions
Clergy
tax exempt organizations (501 plan)
Only for employees
Qualified plan
Distribution 100% taxable, 10% penalty if withdraw before 59.5
Salary reduction agreement 
When TSA funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.

Question 37

Simple plan

Answer 37

Biz <100 people, employee make pre tax contribution and employer makes matching
Regardless of how much is invested in a SIMPLE IRA through work, an investor may still invest in an IRA if he has earned income and is under 70 1/2. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual’s case, however, the contribution would probably be nondeductible.

Question 38

Full POA

Answer 38

Full power of attorney gives the named third party, the designee, all of the power of the owner except the right to change the name on the account.

Question 39

Avoiding 10% penalty

Answer 39

Death, disability, first time homebuyer, education expsnese, medcial premiums while unemployed, rule 72t

Question 40

ESPP

Answer 40

Payroll deduction plan
caclulated on a pretax salary but taken after tax
At end of purchase period, employer will purchase company stock for particpants

Question 41

Transfer and ship

Answer 41

The term “transfer and ship” means to transfer the securities into the name of the customer and to ship (deliver) the securities to the customer. Hold in street name would require the securities to be transferred into the name of the broker/dealer and held in safekeeping.

Question 42

Contributions deductions

Answer 42

Can’t deduct if already qualified by employer plan or in a DB plan

Question 43

Partial POA vs. Full POA

Answer 43

For anyone other than the account owner, entering trades and withdrawing assets requires a full power of attorney. A limited power of attorney enables a nonaccount owner to enter trades but not to withdraw assets.

Question 44

Margin trading trust account

Answer 44

Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.

Question 45

RMD

Answer 45

April age 70.5

Question 46

Durable POA

Answer 46

A durable power of attorney gives power of attorney to someone else to handle financial affairs in the event that the grantor becomes incapacitated. A durable power of attorney is unlike a regular power of attorney, which terminates once the grantor becomes incapacitated.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 372). Wiley. Kindle Edition.

Question 47

ACAT time to validate and transfer

Answer 47

Under the Uniform Practice Code the carrying broker/dealer has 1 business day to validate positions and 3 business days to transfer to the receiving broker/dealer after validation

Question 48

Conversions

Answer 48

The IRS allows individuals to convert money from an IRA to a Roth IRA. Even if an
individual’s income is above the allowable limit to contribute to a Roth IRA, they can still convert
money to a Roth from a (traditional) IRA. However, no additional contributions to the Roth are
allowed.
When completing a conversion, all the money that is being converted from the IRA to the Roth IRA
will be money that has never been taxed. Therefore, when converting to the Roth IRA, all of the
money being converted is subject to ordinary income taxes in the year of the conversion.
In addition, if any required minimum distributions are required in the year of the conversion, the
minimum distribution must be taken prior to the conversion.
Generally, converted assets must remain in the Roth IRA for at least five years to avoid penalties
and a 10% penalty tax. Distributions from a Roth IRA are tax-free and penalty-free provided it has
been established for at least 5 years and at least one of the following conditions has been met:
 You reach age 59½
 You pass away
 You become disabled
 You make a qualified first-time home purchase

Question 49

Cost basis of a stock

Answer 49

To determine the cost basis per share on a straight transaction of stock, just divide the cost basis by the number of shares purchased: To calculate the cost basis per share on a security that has been converted, take a look at the following example:

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (pp. 257-258). Wiley. Kindle Edition.