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Series 7 > Unit 1: Customer > Flashcards

Unit 1: Customer Flashcards

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Series 7 Top-off Exam flashcards
1
Q

What is a Coverdell Education Savings Account (CESA)?

A

Qualified education plan (pre-tax)

$2k annually per child up to 18

Contribution is non-deductible but earnings are tax-free if used for qualfiied education expenses

Can be used for K-college

If not used by 30th birthday, transfer to relative

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2
Q

What do you need to add or remove a person from an account?

A
  1. Birth date
  2. SSN
  3. Contact information

Both parties need to sign

Registered principal must approve the change before transactions are executed

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3
Q

What happens in internal transfers?

A

All parties must provide approval of the transfer

If transferring stock to another person, stock transfer for must be completed

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4
Q

What are the requirements of a Customer Identification Program?

A

Required:

  1. Name
  2. Legal address (residence or business)
  3. Date of birth
  4. Identification number (Tax ID or SSN)
  5. Additional: taxpayer ID, passport number, alien ID card
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5
Q

What is the OFAC list?

A

List is maintained to identify names of terrorists / criminals

Transactions are blocked and law enforcement is notified

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6
Q

What are requirements of client information privacy?

A

Cannot disclose except if

  1. ordered by a court or a government
  2. client provides written permission
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7
Q

What is regulation SP?

A

Created rules for protecting privacy of client confidential information

Clients provided with privacy notice at the opening of account and annually thereafter

Requires disclosure of information of whats shared and with whom

Requires a reasonable opt out provision

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8
Q

What is a corporate insider?

A

Officer, director, or owning >10% ownership

Form 3 with SEC in 10 days
Form 4 to report purchases and sales within two business days (no reporting with regard to 401k)

Cannot engage in short sales of company shares
Cannot retain short swing profits

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9
Q

What must a member firm employee do before their open an account with another firm? What must the firm get if they request?

A
  1. Obtain employer’s written consent
  2. Provide written notification of his association to the executing firm
  3. If you are moving firms, you have 30 days to report this information

They have to receive duplicate statements (joint accounts with spouse or kids)
1. Mutual funds, 529, UITs, etc. not really necessary

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10
Q

Who are principals? What are the names of the principal who supervises options, municipals, and general activities?

A
  1. People who are engaged in management of a member firm and are responsible for account approval and maintenance
  2. All RRs are assigned to a principal
  3. Registered Options
  4. Municipal Securities
  5. General Securities Principal
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11
Q

What is regulation T?

A

Regulation T must be obtained for purchases that are made in either cash or margin accounts within two business days of settlement (S+2 or T+4)

Payment extension may be granted by the firm’s SRO

If no payment is made and no extension is granted, the position is closed out (securities sold) on the third business day following settlement

Result of non-payment is that the account is frozen for 90 days (all payments must be made in advance)

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12
Q

What is freeriding?

A

If you buy a stock and sell it quickly to pay for it

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13
Q

What does ERISA determine?

A

Eligibility and vesting schedules for qualified retirement plans

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14
Q

When must a privacy notice be provided?

A

When opening the account and annually thereafter

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15
Q

What is a non-qualified deferred compensation plan (NQDC)?

A

Unfunded retirement plan that generally promises to pay

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16
Q

What is a cash account? What may only be opened as a cash account? What accounts may only be opened as cash accounts?

A

Account that must be paid in full for any securities purchased

  1. IRAs
  2. 401ks
  3. UTMA and Coverdell (ESA)
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17
Q

What is a margin account? What does margin refer to?

A

Account where customers can use cash and credit to purchase securities

Margin refers to the minimum amount of equity a customer must deposit to buy securities

Not allowed for retirement accounts or for minor children

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18
Q

What are fee-based accounts? What is required to be received? What do they reduce the likelihood of?

A

Accounts for people who do a moderate amount of trading

Based on a % of assets

Disclosure document

Churning

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19
Q

What is a wrap account?

A

Charge a single fee and get a bunch of services with it (asset allocation, portfolio management, executions, administration)

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20
Q

What is a prime brokerage account? What is required?

A

Account where a customer gets an institution to serve as manager and have a bunch of different executing brokers

Prime broker signs an agreement with the customer spelling out the terms of the agreement and the names of each executing broker
Prime broker executes contracts with all of the executing brokers

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21
Q

DVP vs RVP?

A

When institutions hold stock and cash in escrow and make same day settlement transactions for institutions

22
Q

What is a day trader? What is a pattern day trader? What is the minimum equity requirement for pattern day traders? Before opening an account, what documentation must they have?

A

Someone who buys and sells the same security on the same day to try to take advantage of price movements

Someone who executes 4 or more day trades in a five business day period - $25k

  1. Provide the customer with a risk disclosure statement
  2. Approve the account for day trading or receive from the customer a written statement that the customer does not anticipate engaging in day trading
23
Q

What is a joint account? What documentation is needed? What are the owners called? Who are checks depositable to? Who must sign to sell securities? Who is suitability on?

A

Joint account is when two or more adults are on the account as co-owners

Joint account agreement must be signed

Tenants

Both (1 address needed)

Both

Both

24
Q

What is Joint Tenant with Rights of Survivorship (JTWRS)? What happens if someone dies? What is ownership? Who can take out cash? Who can make trades?

A

Joint account between married couples (or multiple people)

Deceased person’s interest passes to the surviving tenant

Ownership is equal

Both parties need to take out cash, but does not need to be principal approved

Either can make trades

25
Q

What is a Tenants in Common (TIC) account? What happens to ownership when people die? Who uses it typically? What is the typical ownership?

A

Ownership in deceased tenant’s fractional share in the account goes to the estate

Commonly used for non-spousal relatives or friends

Ownership is unequal

26
Q

What are custodial accounts? What can the custodian do? What are UTMA and UGMA? If opening a UTMA or UGMA, which SSN do you need?

A

Accounts where there is a custodian and a beneficiary - typically used for adults and minors

Managed by a custodian until the minor reaches legal age

Must be used for the general benefit of the beneficiary

  1. Buy or sell securities or real estate
  2. Exercise rights or warrants (cannot let them expire)
  3. Liquidate, trade or hold securities

Restrictions

  1. All gifts are irrevocable
  2. 1 custodian, 1 beneficiary
  3. Donor of securities can be custodian or appoint someone
  4. Parents have no control (unless they are the custodian)
  5. Minor can be beneficiary to muiltiple accounts; custodian can be to multiple accounts
  6. Minor can sue
  7. Can only be cash accounts, no margin

SSN of the minor / beneficiary

27
Q

What is transfer on death (TOD)? What legal documents are needed? What does it avoid? How often can beneficiaries be changed?

A

Account registration that allows owner to pass all or a portion to single or multiple beneficiaries

No documents needed

Avoids probate but does not avoid estate tax

Can change beneficiaries whenever

28
Q

What is a sole proprietorship? Who is liable for income or losses?

A

Simplest form, treated like an individual account

Liability: Individual
Taxes: Direct

29
Q

What is a general partnership? Who is liable? What happens to taxes?

A

Unincorporated association consisting of two or more individuals

Partners manage and are responsible for the operations and debts of the business

Taxes are pass through

30
Q

What is a limited partnership? Who is liable?

A

Management and liability assigned to general partners

31
Q

What is an LLC?

A

Limited Liability Corporation

Limited liability with tax advantages of a partnership (pass through)

32
Q

What is an S corporation?

A

Taxed like a partnership (pass through)

Offers limited liability

Limited to 100 members

33
Q

Whats on a new account form? When must the account form be delivered? How long after that?

A
  1. Customer Name
  2. Address
  3. Legal Age
  4. RRs of Record
  5. Names of people who will transact
  6. Signature of the partner, officer or principal signifying the account is accepted

Reasonable effort to get

  1. Customer’s tax identification or SSN
  2. Occupation of customer and employer
  3. If they are an associated member of another firm

Within 30 days of opening and every 36 months thereafter

34
Q

What is Customer Identification Program (CIP)?

A

Financial institutions have to verify identity of customers

  1. Government ID
  2. Corporation docs

Maintain records of info retained
Determine if they are on OFAC

If non-US person, needs to get taxpayer identification card or passport

35
Q

If a member firm employee wants to open an account with another member firm, what is needed? What must they receive? When is it not needed?

A

Employee must notify the employer and FINRA member firm must provide written permission

  1. Duplicate copies of confirmations
  2. Account statements

MSRB requires it except for 529 plans

If its clear they are buying mutual funds or variable annuities. Does not apply to insurance products.

36
Q

What are the regulations around Trusted Persons?

A

If a senior (65+) or someone 18+ with mental impairment is seemingly doing something suspicious like wiring funds outside of their account, a 15 business day hold can be placed

Only applies to the person, not the specified adult

37
Q

What is Regulation S-P? When must it be provided? How are consumers vs customers vs institutions treated? How long does the broker-dealer have until they can start providing information?

A

Financial firms must provide privacy notice describing their policies. If you provide data to third parties, customers can reasonably opt out. Cannot ask them to write a letter

Institutions are not covered, consumers receive it initially and never thereafter, consumers (below)

When an account is opened and annually thereafter

30 days

38
Q

What is power of attorney? What is limited vs full authority? What is durable power of attorney?

A

When a customer signs off the trading rights to someone else

Full power enables trading + deposit or withdraw cash / securities
Limited allows buy and sell orders (but not withdrawal of funds)

Durable power survives physical or mental incompetence but not death of either party

39
Q

What is a trusted person?

A

may help the member firm respond to possible financial exploitation or fraud in the client’s account.

This is not power of attorney

40
Q

What is required to make a change?

A

Principal approval

Facts must be documented in writing and preserved with the account records

41
Q

What is a sweep account?

A

Its an account where cash is held after a sale

42
Q

What is a negative response letter?

A

Informs recipient of an impending action and requires the recipient to respond in a certain timeframe

43
Q

What does Tax Deferred mean? Qualified Plan? Qualified? Nonqualified? Deductible contribution?

A

Income tax is deferred until withdrawal

Qualified plan: pre-tax dollars and earnings grow without any tax until funds are withdrawn (ERISA)

Qualified: Pre-tax dollars and earnings are tax deferred (qualified plan or traditional IRA)

Nonqualified: Deferred compensation plan, pay received when you have a lower tax bracket, can choose employees (do not comply with ERISA), after-tax dollars

Deductible contribution: Pre-tax income that’s deductible from income

Nondeductible contribution: Contribution to a qualified plan or IRA that’s made with after-tax dollars, grows tax deferred

44
Q

What is a payroll deduction plan?

A

Enables employers to deduct a specified amount for retirement savings from their paychecks

Deducted after taxes are paid

45
Q

Any taxable distribution from a retirement account is taxed at what rate?

A

Ordinary income

46
Q

What age do you need to be to make IRA contributions? What is the age restriction? When do you need to make RMDs? What is an exception to the 10% penalty? Required distributions are required to do? What are qualified expense limits for 529 plans? To be eligible for 401k, how much do you have to work?

A

As long as you have earned income

No age restriction

72

$5k the first year a child is born or adopted (married couples can do $5k each = $10k)

Pulled out within 10 years of original owners death

$10k per child in lifetime

500 hours in 3 years or 1000 hours per year

47
Q

What is a traditional IRA and what are its contribution limits? What can you not contribute to it? What did the EGTRRA establish as the catch-up limits? What happens if you open a spousal IRA? What day do you need to contribute by? What is the excess contribution penalty? When must you start taking RMDs?

A

Pre-tax income for $6k per individual or $12k per couple

Capital gains, interest or dividend income

$1,000 after age of 50

You can contribute $12k even if one of them doesn’t make enough

April 15 (even if you file an extension)

6% of contribution above the IRA max

April 1 of the year you turn 72, then December 31

48
Q

What age can you take contributions from a Roth IRA? What else can you use it for? What is the taxation

A

59 1/2

$10k for a first time purchase of a principal residence

Its all tax free

49
Q

What is a Roth Conversion? How does the rollover work?

A

Take a traditional IRA and convert it to a Roth

Direct rollover trustee to trustee within 60 days there will be no 10% early distribution tax penalty if under age of 59.5

50
Q

What investments are not allowed in retirement accounts?

A
  1. Collectibles
  2. Insurance
  3. Short sales of stock
  4. Speculative options
  5. Margin
51
Q

What is a 60 day rollover? Direct rollover

A

Can complete once per 12 month period
Must complete in 60 calendar days

Direct: funds never actually go to the employee

Series 7 (9 decks)

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