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Series 7 chapters 1-5 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

To know your customer, what information should you gether

A
  1. Financial situation (tax considerations, income, balance sheet) 2. Personal Characteristics (age, risk tolerance, social values) 3. Financial Objectives and Investment Goals (current income, speculation, retirement fund, college fund, liquidity)
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2
Q

what tax considerations do investors have

A
  1. marginal tax bracket (rate individual is taxed) 2. Investment Income 3. Estate and gift taxes 4. Capital gains and capital losses
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3
Q

what is the gift tax that donors can give without tax consequences

A
  1. 15k to as many people as you want 30k if married 2. unlimited between spouses
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4
Q

max tax rate for long term gains (short term are taxed at ordinary income)

A

20%

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5
Q

formula to determine the percent of the portfolio that should be devoted to equity

A

100-age = equity

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6
Q

risk factors for individuals

A

Not based solely on financials situation, also based on values and attitudes on investing

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7
Q

suitability

A

suitability is based on the client’s portfolio when an account is opened and ongoing. it applies to recommended transactions and investment strategy

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8
Q

is suitability determined by gains or losses

A

no

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9
Q

what is institutional suitability

A

the extent of the obligations are less than retail and based on - those servicing the account having a reasonable belief that the client is capable of evaluation investment risks, and the inst client affirmatively stating that it is exercising independent judgment

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10
Q

what are FINRA’s three suitability rules

A
  • RRs must have a reasonable basis to believe that 1. reasonable basis (suitable for some investors 2. customer specific obligations 3. quantitative obligations (if it is excessive when client’s profile is taken into consideration)
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11
Q

SEC suggests (not required) the following methods to verify a customers net worth and sophistication. SEC does require a reasonable attempt should be made before recommending investments

A
  1. review previously filed IRS tax form 2. review bank and brokerage account statements 3. obtain written verification as to the customers accredited status from BD or IA
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12
Q

what is an investment analysis too

A

a technological tool that provides simulations and statistical analysis of the likelihood of different investment outcomes

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13
Q

what are firm requirements for investment analysis tood

A

disclose the criteria, methodology, and tool’s limits. that results may very and past performance doesn’t indicate future gains. how investments are selected etc and FINRA must have access to the tool if it is being provided to retail investors

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14
Q

does FINRA have to have access to the investment analysis tool if it is just for inst investors?

A

no, only if it is for the retail investors

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15
Q

what must be obtained when opening a customer account

A
  1. Name of customer (code can be used if the BD knows identity) 2. residence (cannot open with P.O box unless military) 3. of legal age 4. name or names of reps who may be providing advice 5. principal must approve and sign the account, client does not need to sign
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16
Q

how often must customer information be sent to customers to verify it is accurate

A

when opening and every 36 months

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17
Q

what additional information does FINRA suggest RRs get from customers

A
  1. tax ID and SSN 2. Occupation and Name of employer 3. weather associate with a related firm. you should document refusal to provide information
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18
Q

types of joint account - community property account

A

can only be established by legally married couples who complete community property document. essentially same as JTWROS but based on laws of state. each owns half of account

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19
Q

Joint tenancy in common JTIC

A

each tenant owns a specified amount (doesn’t have to be equal) if one dies, their portion is transferred to the estate

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20
Q

a business operated under the name of an individual owner, all investments in the account are titled in the owners name and the account is vulnerable to owners personal creditors

A

Sole proprietor

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21
Q

Similar to sole proprietor and partnership. Opened in owner(s) and ownership in account is subject to creditors.

A

Unincorporated associations

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22
Q

Specifies persons authorized to exercise trades, each partner has portion of interest in account included under personal assets

A

Partnership.

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23
Q

what must be signed to set up a discretionary account

A

power of attorney . principal must approve account in writing prior to opening

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24
Q

when do orders for discretionary accounts need to be reviewed by principal

A

Promptly (not prior to each trade) activity needs to be monitored for churning

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25
Q

difference between limited trading authorization and full trading authorization

A

full can withdraw cash and securities of the account, in addition to buying and selling securities. full authority is reviewed annually, but power of attorney lasts through life or until canceled.

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26
Q

revocable vs irrevocable trusts

A
  1. revocable or “inter vivos” or “living trust”, gives person who granted trust ability to revoke or change terms, does not reduce estate taxes but avoids probate if funded prior to donor’s death 2. irrevocable cannot make changes once trust agreement is signed, reduces estate tax a nd avoids probate
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27
Q

purchase and sale (or short and subsequent purchase) done in the same day. Must be in margin account to avoid free riding.

A

pattern day trade account

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28
Q

How many days must a pattern day trader trade to be defined as such

A

4 day in over a 5 day period

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29
Q

prior to opening a day trading account, what must be provided to a non-inst customer?

A

Risk Disclosure Statement, which highlights that day trading can be risky, be wary of large profit claims, requires knowledge of securities markets, and will generate substantial commissions. that it might results in losses beyond initial investments . accounts HAVE to be approved for day trading

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30
Q

if an account accidentally becomes a day trading account, within how many days must it be approved

A

10 days

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31
Q

provides large clients with the ability to clear all trades through a centralized firm with executions occurring within multiple BDs. offers custody, sec lending, margin financing, clearing, processing, operation support etc

A

prime brokerage

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32
Q

COD / DVP/ RVP

A

acronyms used to describe situations in which a client (usually inst) uses a bank to settle trades with one of more BDs. BD must first collect customers bank account details

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33
Q

what does DVP and COD mean? what about RVP

A

delivery vs payment. Collect on Delivery. RVP - receipt vs payment when selling securities

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34
Q

fee based accounts

A

Customer is not charged on a transaction basis. Advisory / custodial fee that wraps everything into an annual basis (i.e. wrap accounts). suitable for active traders

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35
Q

set up in 1974 to prevent misuse of defined benefit and defined contribution pension plans

A

ERISA

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36
Q

under ERISA who must employers offer plans to

A

21 or older and 1 year of full time service (1,000 a year). it also specifics the percentage of the employer’s contribution to which the employee is entitled to withdrawal the plan and employees are 100% vested in their won contributions. employer and employee contributions are tax-deductible and earnings are tax deferred

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37
Q

how are retirement plans taxed

A
  1. pretax contributions have zero cost basis (tax at withdraw) 2. after-tax contributions are part of cost basis (tax free at withdrawal and earnings are tax deferred. retirement plans NEVER generate capital gains or losses
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38
Q

how are distributions from retirement plans taxed

A

any portion representing pre-tax contributions are taxable as ordinary income. any portion representing after-tax contributions is a return of capital and not taxed. earnings are taxed as ordinary income. subject to required min distributions RDM

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39
Q

What is the age and amount for early withdrawal penalty

A

before age 59.5 and 10%. exemptions - rollover or trustee to trustee transfer

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40
Q

what are the rules for plan rollovwers

A
  1. owner receives proceeds, only once per year and must be completed within 60 days
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41
Q

what are the rules for trustee to trustee transfers

A

owner does not have access to funds and may be more than once per year

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42
Q

what plan is used by state and local gov employees

A

457 - generally has zero cost basis (pre-tax dollars) and contributions are subject to a max annual amount

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43
Q

Plans where contributions are discretionary, decided by BOD. Contributions subject to max annual amounts and allocation of contributions to employees is based on predetermined formula.

A

profit-sharing plan

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44
Q

Company contributes its stock or money to purchase stock as part of the plan. stock is not held directly while employed but distributed when no longer employee

A

Employee Stock Ownership Plans ESOPs

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45
Q

agreement between an employer and specific employee, generally unfunded and represents and promise to pay at retirement. NOT subject to ERISA and exempt from IRS approval requirements

A

Non-qualified deferred compensation plans NQDC

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46
Q

education saving plan that is created for the purpose of paying qualified education expenses of a designated beneficiary. max contribution of 2k per year until child is 18. contribution is non-deductible but earnings grow taxed free as long as used for qualified for ANY (k-college) education expense. Must be used by 30th birthday or transferred to a relative

A

Coverdale Education savings Account CESA

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47
Q

education plan that is operated by a state and designated to meet the costs of both college and k-18. allows for 15k contribution from unlimited donors

A

529 plan

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48
Q

account registration change

A
  • if married - requires marriage certificate, divorce decree, or court document 2. to add someone, you will need birth date SSN and contact info, usually both parties must sign 3. a registered principal must approve
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49
Q

internal transfers

A

all parties on the account must approve the transfer, if transferring stock to another person, a stock transfer form must be completed, the process is different than transfers of accounts between brokerage firms

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50
Q

Customer Identification Program CIP to VERIFY identity (not open account). verification has to be within reasonable time of opening account

A
  1. required identifying info (name, address, DOB, SSN 2. identification number for US person 3. Identification number of NoN US Person 4. Office of Foreign Assets Control OFAC
51
Q

what is the OFAC llist

A

maintains names of suspected terrorist’s or criminals. if clients name is on this list, all transactions must be blocked and law enforcement needs to be notified

52
Q

protecting client info involves what

A

cannot disclosure client info unless ordered by court or client provides written permission. when opening an account and annually after, as part of SP client is provided with a privacy notice. requires disclosure of information that is shared and with who. requires reasonable opt out provision.

53
Q

rule created for protecting privacy of client confidential into

A

regulation SP

54
Q

insider definition

A

any officer, director, or any individual who owns more than 10% of voting stock

55
Q

if you are an insider, what form do you need to fill out and by when

A

File form 3 with SEC within 10 days of becoming insider and file form 4 to report purchase and sales within two business days.

56
Q

what are insiders prohibited from?

A

engaging in short sales of own company, retain short swing profits (stock held less than 6 months) profits from less than 6 months ago go back to company.

57
Q

what are the requirements of an employee to open an account with another firm

A
  1. employee (and spouse, joint accounts etc) must obtain employer’s prior written consent, and provide written notification of association to executing firm. Once joining a firm you must satisfy the requirements within 30 days or opening or employment.
58
Q

what are exempt from rules when opening an outside brokerage account

A

accounts for purchasing mutual funds, variable annuities, UITs or 529 plans

59
Q

according to the FRB the regulation T payment must be obtained for purchases that are made in either cash or margin accounts within how many days

A

within two business days of settlement. payment extensions may be granted by firms SRO. If no payment is made, the position is closed out on the third business day and customer account will be frozen 90 days (trades can be done but payments must be done in advance)

60
Q

investors who buys stock and subsequently sales it and uses procedures to pay for sale is called

A

free riding

61
Q

any written communication to 25 or fewer retail investors in 30 days

A

correspondence, subject to review but not approval

62
Q

any written communication to 25 or more retail investors in 30 days

A

retail communication - subject to preapproval and filing with FINRA

63
Q

any written communication that is only distributed to institutional investors in 30 days

A

institutional communication -subject to review but not approval . if ANY is sent to retail, it is not inst comm. if you give a class to other RRs, this is considered Inst.

64
Q

what retail communication needs to be filed?

A
  1. 10 business days prior to - investment companies that contain self created rankings, securities futures, bond mutual funds that incorporate volatility ratings 2. 10 business days after 1st use - investment companies with no self rankings, DPPs, CMOs, securities derived from another security or index, free writing prospectuses that are widely distributed
65
Q

what communication does not need principal approval?

A
  1. material that does not make recommendations, does not promote a product or service, correspondence, institutional communication. Retail communication and correspondence must disclose the name of the BD
66
Q

public appearances / retail communication

A

any handouts at public appearances are retail communication

67
Q

how is interactive content for social media treated

A

considered retail communication but subject to the same review and supervision as correspondence (not preapproved). a principal must approve the use of the social media site. records must be maintained for any business communication, including those made on personal devices. if making recommendations must be pre-approved. if RR shares like or comments, they are subject to FINRA rules. The use of testimonials is prohibited by firms that are registered investment advisors

68
Q

what is omitting (summary) propectus

A

Filed with SEC and contains the highlights. clients may make a purchased based on the contents of this document but must be told a full version is available and a complete prospectus must be sent by settlement, along with a confirmation

69
Q

IF a 482 advertisement includes performance info, it must include what

A
  1. past performance … cant include guarantee. 2. that returns will fluctuate 3. performance does not reflect deduction of sales load
70
Q

what can generic fund adverting include

A
  1. cannot refer to specific fund, can include how the fund operates, basic description of the types of funds, invitation to inquire for additional info
71
Q

use of ranking entities (morning stars, lipper)

A

SEC required for money market funds - 7 day yield for other funds 30 day yields. disclosures include objective of the fund, name of the ranking entity, criteria, past performance does not guarantee, explanation of symbols

72
Q

when can bond fund volatility ratings be disclosed

A

only as supplemental sales materials if person has received prospectus

73
Q

what are the variable product communications requirements

A
  1. that it is an insurance product 2. that they are long term illiquid products 3. that features (like death benefit) are guaranteed by the insurance company not by BD 4. guidelines for hyp illustrations of returns
74
Q

what are the options communications requirements

A

Options disclosure document “Characteristics and Risk of standardized options” every options client must receive an options disclosure doc at time or prior to the account being opened.; any retain communication regarding options must be filed 10 days prior. projected annualized returns are permitted but cannot be based on less than 60 days prior

75
Q

CMO communications

A

CMOs are multi-class debt instruments backed by a pool of mortgage related securities. must include the name Collateralized Mortgage Obligation. Cannot compare to any other investment vehicle. disclose that yield will fluctuate. ads must suggest contacting an RR before investing.

76
Q

municipal communications

A

form letter is any written letter or email to 25 or more persons within 90 day period. if a yield is disclosed, need to also note that actual yields will be lower. ALL advertising must be approved in writing prior to first use by a principal or muni principal. must be kept for 4 years (other ads are required for 3)

77
Q

what are the lengths of quiet periods and research reports

A

For IPOs as the manager or other distribution participant, quiet period is 10 days. for follow on as manager - 3 days. for follow up as other dist participant - no restrictions

78
Q

research report disclosures

A
  1. if the firm owns 1% or more of stock or is a market maker of the stock or received investment banking comp in past 12 months or expects to receive in next three months 2. if the research analysts has financial interest in the company
79
Q

research prepared by an affiliate of the member firm where the member firm has editorial control over content

A

third party research (if independent than it would be independent third party research)

80
Q

when a speaker engages with 15 or more persons or with one or more media represent

A

public appearance

81
Q

what retail communications are required to be filed with FINRA within 10 days of first use

A

DPPs, CMOs, ETNs

82
Q

what retail communications are required to be filed with FINRA 10 days PRIOR to first use

A

those for investment companies with self-created rankings, bond funds including volatility ratings, and security futures

83
Q

what forms of communication are not required to be approved by a principal of riled with FINRA

A

retail communications that do not recommend or promote, institutional communications, and correspondence.

84
Q

common stock ownership rights

A
  1. inspect the books 2. evidence of ownership 3. transfer of ownership 4. voting rights (election of board and issuance of additional shares and stock splits) 5. participate in corp earnings if declared
85
Q

an OTCBB or OTC pink marketplace stock that has a bid price below $5

A

Penny stock (clients must be approved for penny stock trading and receive risk disclosure document

86
Q

Penny stocks are usually solicated sales, what disclousres are required

A

current quote of penny stock, compensation received by BD and RR, does not apply to unsolicited transaction. special suitability rules apply for new clients but not established clients. new clients must sign off on initial penny stock trades

87
Q

what is an established client

A
  1. been clients of firm for more than 1 year, or made three sperate purchases of three different penny stocks on three different days
88
Q

Callable preferred stock

A

issuer can repurchase its stock, typically repurchased at a premium over par value

89
Q

convertible preferred stock

A

investor may convert the preferred stock into a predetermined number of stock (upside potential). preferred stock trades more similar to bonds, with value in income, but this has the benefit of stock. most volitale (based on common stock and interest rates, while other preferred stock are only based on int rates)

90
Q

participating preferred stock

A

Investor may receive additional dividends based on the company’s profits

91
Q

adjustable / variable rate preferred stock

A

dividends vary based on a benchmark, benchmark is typically t-bills

92
Q

series K shares

A

Begins with a fixed rate and later changes to floating rate. depositary shares with each share representing a number of preferred shares. usually callable at day its switches. usually non-cumulative

93
Q

shareholders right to maintain percentage ownership

A

Preemptive right (only for CS) distributed through rights offering, one right for each share owned. issued lower than mv - immediate intrinsic value. very short term. tradable.

94
Q

attached to bonds or stock as sweeteners, allows holders to purchase a specific number of the company’s common shares

A

warrants - long term, may trade separately. usually above MV so no initial intrinsic value

95
Q

facilitates trading of foreign equities in US markets, priced in US dollars, dividends in US dollars. can be sponsored or unsponsored.

A

American depositary receipts (ADR). sponsored may trade on US exchange, unsponsored can trade OTC. if you pay tax to foreign company you can deduct from current income or use credit in future tax.

96
Q

a market with no physical location, negotiated market, unlimited market makers

A

securities exchange

97
Q

Often priced low and thinly traded. have two systems which offer real time quotations (OTCBB and OTC Pink)

A

non-exchange (OTC)

98
Q

no physical location market

A

auction market (NASDAQ, OTC, dark pools, and ECNs)

99
Q

electron system operated by a BD or registered as an exchange that executes / displays order from buyers and sellers, everyone is anonymous. open to everyone

A

Electronic Communication Net works (ECN)

100
Q

provides liquidity for large institution investors and high frequency traders, quotes are not disseminated to the public, limits impact on the market. everyone is anonymous

A

Dark pools

101
Q

taxation of dividends for corpoations

A
  1. qualified (taxed at max rate or 20%) if held 60 days for CS and 90 days for preferred stock. non-qualified cash dividends are taxed and ordinary income rates. taxes paid for ADRs mat be used as a tax credit or tax deduction. 2. if a corp owns less than 20% of another company, 50% is excluded from taxes if the corp owns greater than 20% of more, 65% of taxes can be excluded. dividends from REITS are not qualified and do not benefit from corp div exclusion but can deduct 20% of dividend for REITS
102
Q

cost basis

A

total amount paid to acquire a security, including commissions and other fees

103
Q

capital gains casis

A

based upon selling the security above your cost basis. if held 1 year or less, taxed and ordinary rate, if held over 1 year, taxed max 20% . if a capital loss, offset cap gains, and if loss exceeds gain up to 3k, can be used to offset ordinary income. rest can be carried forward.

104
Q

securities converted to stock are not a taxable event, inherited securities use the market value at the persons time of death for basis, gifted securities basis is the lower of the donor’s cost or market value

A

true

105
Q

how can you identify securities sold if purchasing same security

A

either FIFO and specific ID (identified at time of transaction) if not identified, assumed FIFO. short sales are always short term

106
Q

tax swap and wash sale rule

A

assets may be sold to generate losses in order to offset taxable gains. however the IRS will disallow the capital loss if, within 30 days of sale, the investors purchases substantially the same security or covers a short position and shorts substantially the same security.

107
Q

an unsecured bond

A

debenture

108
Q

Corp and Muni bonds trade at what? and Treasury?

A

all 1000s, (quoted in 100, i.e. trading at 99 is 990) Corp and Munis 1/8 and Treasury 1/32. corp and munis use 360 days and treasury uses 365

109
Q

when does interest start accruing for bonds

A

from the dated date up to first coupon date. if over 6 months, long interest payment, if less than 6 months, short interest payment. payment from dated date to interest date will include accrued interest

110
Q

Bonds when entire bond offering matures on the same date, vs when they mature over periods of time

A

Term bond vs serial bond

111
Q

serial bonds material that are structure so that the principal and interest payments represent approximately equal annual payments over the offering

A

Level Debt service

112
Q

if the bond is at par, what are the NY, CY, and YTM

A

all equal. the YTM factors in the premium and discount.

113
Q

if a bond is trading at a discount, what are the NY, CY, and YTM

A

NY stays the same, CY increases (yield / MV), and YTM increases the most.

114
Q

risk that an issuer may default and not ale to meet its obligation to pay interest

A

credit risk, return should equal the risk free rate plus a premium for risk

115
Q

S&P / Fitch vs Moody’s ratings

A

S&P and Fitch. AAA+ while Moodu=ys Aaa1. Bonds below BBB / Bbb are speculative grade or junk or high yield bonds

116
Q

yield to materuity

A

aka basis aka yield, includes the reinvestment of interest and the fain / loss over the life of the bond, measured to the bonds maturity

117
Q

basis point

A

100 in 1% or 1/100 or a percent

118
Q

Allows the issuer to redeem bonds prior to maturity, either in whole or partial (lottery call)

A

Call provision (usually have higher yield or premium). If called investor receives call price plus accrued interest. if interest rates fall, issuer more likely to call.

119
Q

allows the bond holder the right to redeem the bond / put it back to the issuer prior to maturity.

A

put provision. usually issued with lower interest rates. investors want this if interest rates go up.

120
Q

advance refunding / pre-refunding

A

New bond issued, proceeds deposited into escrow account and invested in IS gov securities managed by a trustee. Amount deposited is sufficient to pay debt service. If paid at all date “pre-refunded to the call” if paid at maturity “escrowed-to-maturity” ETN. pre-refunded bonds are no longer the issuer’s liability and AAA rated. defeasance - elimination of restrictive covenants

121
Q

tax implications of taxable bonds (corp bonds)

A

interest treated as ordinary income subject to federal, state, and local tax. accrued interest that buy pays seller, seller reports as interest received and pays tax. buyer reports interest payment minus amount paid to seller. on zero coupon bonds, the difference between the par and issue amount is taxed. amount is calculated each year, you increase your cost basis by the amount you consider interest income up to par at maturity. no cap gain or loss at maturity.

122
Q

Discount bond taxation

A
  • capital gain or loss is determined by the difference between the bond’s cost basis and the sales proceeds. result is a capital gain
123
Q

premium bond taxation

A

Capital gain or loss is determined by the difference in amortization cost basis and sales proceeds. result is capital loss.

Series 7 (4 decks)

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