Series 7 Chapter 2 Flashcards
cash account
is the most basic investment account. Anyone eligible to open an investment account can open a cash account. In a cash account, a customer pays in full for any securities purchased.
Certain accounts must be opened as cash accounts, such as personal retirement accounts (individual retirement accounts and tax-sheltered annuities), corporate retirement accounts, and custodial accounts (Uniform Gift to Minors Act and Uniform Transfers to Minors Act accounts).
TOD
This is an account that allows the registered owner of the account to pass all or a portion of it, upon death, to a named beneficiary. This account avoids probate (having the decedent’s will declared genuine by a court of law) because the estate is bypassed. However, the assets in the account do not avoid estate tax, if applicable.
TOD accounts are available for individual accounts and for certain joint accounts (joint tenants with rights of survivorship).
Inheritance
When a person dies and leaves securities to heirs, the cost basis to the recipient is the FMV on the date of the owner’s death
Margin Account
In a margin account, the customer can use some cash and some credit to purchase securities. This is a leveraged purchase of securities; investors can buy more securities with some cash and some credit than they can purchase with just cash. The firm can lend funds at the time of purchase, with the securities in the portfolio serving as collateral for the loan. This is called buying securities “on margin.” The shortfall between the purchase price and the amount of money put in is a loan from the brokerage firm, and the customer will incur interest costs, just as with any other loan.
Margin transactions are not available for use within mutual funds, retirement accounts, or in custodial accounts for minor children.
prime brokerage account
A prime brokerage account is one in which a customer, generally an institution, selects one member firm (the prime broker) to provide custody, trading and other services, while other firms, called executing brokers, typically execute most of the trades placed by the customer. To open a prime brokerage account for a customer, a member (the prime broker) must sign an agreement with the customer, spelling out the terms of the agreement, as well as names of all executing brokers the customer has contracted with. The prime broker will then enter into written agreements with each executing broker named by the customer. The customer receives trade confirmations and account statements from the prime broker, who facilitates the clearance and settlement of the securities transactions. Responsibility for compliance of certain trading rules rests with the executing brokers.
The key advantage of a prime brokerage account is that it usually provides a 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. A prime brokerage account often includes a list of specialized services, such as securities lending, margin financing, trade processing, cash management, and operational support. Prime brokerage accounts are likely to be offered to a BD’s more active trading clients, like hedge funds, for example, who may require a number of executing broker outlets to conduct their transactions and who can benefit by having margin requirements that are netted across all of the prime broker’s positions.
Fee based account
Many firms offer investors fee-based accounts that charge a single fee (either fixed or a percentage of assets in the account) instead of commission-based charges for brokerage services. Fee-based accounts are not wrap accounts.
Wrap account
Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.
advisory account
An advisory account is an account through which a Registered Investment Adviser (RIA) or an Investment Adviser Representative of the RIA provides investment advice to clients for a fee. It is important to understand that an advisory account is very different from a brokerage account. In a brokerage account, a fee is paid when transactions occur. In advisory accounts, a fee is paid for advice regarding the securities in the account. An RIA has a fiduciary obligation (is legally obligated) to act in the best interests of clients at all times. RIAs must provide clients with a Form ADV which describes how they do business, reveals any potential conflicts of interest, and clearly describes how they are compensated.
transfer and ship
Securities are registered in the customer’s name and shipped to them.
transfer and hold in safekeeping
Securities are registered in the customer’s name, and the BD holds them in safekeeping.
Holding in street name
Securities are registered in the BD’s name and held by the BD. Although the BD is the securities’ nominal owner, the customer is the beneficial owner.
delivery vs payment
DVP securities are delivered to a bank or depository against payment. Normally used for institutional accounts, this is a cash-on-delivery settlement. The BD must verify the arrangement between the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale. In addition, the customer designates whether the BD should hold or forward any cash balance.
single(individual) account
Has one beneficial owner
he account holder is the only person who may:
■ control the investments within the account; and
■ request distributions of cash or securities from the account.
joint account
In a joint account, two or more adults are named on the account as co-owners, with each allowed some form of control over the account. In addition to the appropriate new account form, a joint account agreement must be signed.
The account forms for joint accounts require the signatures of all owners. Joint account agreements allow any or all tenants to transact business in the account. Checks must be made payable to the names in which the account is registered and must be endorsed for deposit by all tenants (although mail need be sent to only a single address). To be in good delivery form, securities sold from a joint account must be signed by all tenants.
The suitability requirements for a joint account follow the same basic rules as all accounts—put the interest of the client first. Because a joint account is really nothing other than a collection of individuals, suitability information must be obtained on all of the account owners and any recommendations must be appropriate based upon that information. In other words, the suitability of recommendations must be based on the group, not on any individual within the group.
Joint tenant with rights to survivorship
JTWROS ownership stipulates that a deceased tenant’s interest in the account passes to the surviving tenant(s).
Tennants in common
TIC ownership provides that a deceased tenant’s fractional interest in the account be retained by that tenant’s estate and not passed to the surviving tenant(s). If one account owner dies or is declared incompetent, all pending transactions and outstanding orders must be canceled immediately.
Community property
is a marital property classification recognized by some—but not all—states. In these jurisdictions, most property acquired during the marriage is considered to be owned jointly by both spouses and would be divided at the time of divorce, annulment, or death. Joint ownership is therefore automatically presumed by law in these jurisdictions, absent any specific evidence that would point to a contrary conclusion for any item of ownership. Exceptions are made for inheritances, gifts, or any property that is owned by one spouse before marriage, which is considered the separate property of that spouse, unless it was designated to be owned jointly by both spouses during the marriage.
It is important to know that laws in jurisdictions where community property is presumed differ from state to state. Additionally, community property can have certain federal tax implications. Generally, community property may result in lower federal capital gains taxes after the death of one spouse when the property is dissolved by the surviving spouse. Some states have created separate classifications called “community property with rights of survivorship” that are similar to joint tenancy with rights of survivorship property designations.
sole proprietorship
This is the simplest form of business organization and is treated like an individual account. In a sole proprietorship, all income (or loss) is that of the individual. In fact, one of the risks of operating in this fashion is that all the owner’s assets are liable for the debts of the business— you can lose everything. Obviously, this is one of the major considerations when opening an account for this form of business.
This is an account that is easy to create and easy to dissolve.
partnership
A partnership is an unincorporated association of two or more individuals. Partnerships frequently open cash, margin, retirement, and other types of accounts necessary for business purposes.
partnerships must complete a _____
partnership agreement stating which of the partners can make transactions for the account. If the partnership opens a margin account, the partnership must disclose any investment limitations.
An amended partnership agreement must be obtained each year if changes have been made.
corporate accounts
A registered representative who opens a corporate account must establish:
■ the business’s legal right to open an investment account,
■ an indication of any limitations that the owners, the stockholders, a court, or any other entity has placed on the securities in which the business can invest, and
■ who will represent the business in transactions involving the account.
corporate charter
corporate resolution
When opening an account for a corporation, a firm must obtain a copy of the corporate charter and corporate resolution
The charter is proof that the corporation does exist, and the resolution authorizes both the opening of the account and the officers designated to enter orders.
dividend exclusion rule
Dividends paid from one corporation to another are 50% exempt from taxation. A corporation that receives dividends on stocks of other domestic corporations, therefore, pays taxes on only 50% of the dividends received. This provision encourages corporations to invest in common and preferred stock of other U.S. corporations.
numbered accounts
If requested, a customer’s account may be identified by only a number or symbol. The customer must sign a form certifying that he owns the account(s) identified by the number or symbol and must supply other information identifying himself as the owner.